M/S. Sitalpur Sugar Works Ltd vs Commissioner Of Income-Tax, Bihar And ... on 10 April, 1963 Equivalent citations: AIRONLINE 1963 SC 4, 1963 (49) ITR 160 PETITIONER: M/s. SITALPUR SUGAR WORKS LTD. Vs. RESPONDENT: COMMISSIONER OF INCOME-TAX, BIHAR AND ORISSA DATE OF JUDGMENT: 10/04/1963 BENCH: ACT: Income Tax--Expenditure incurred on dismantling a factory at one place and setting it up at another--Capital expenditure and not revenue expenditure--Depreciation on capital expenditure-Depreciation not allowed on amount spent for acquiring an advantage--Indian Income-tax Act, 1922 (11 of 1922), s. 10 (2) (vi). HEADNOTE: The appellant, a company manufacturing sugar, shifted its factory from the old site to a new site and incurred a total expense of Rs. 3,19,766/- on the dismantling of buildings and machinery, transporting machinery from the original site to the new site and refitting the same there. Held that the appellant was not entitled to a deduction of this expense for income-tax purposes as an expense incurred for carrying on the concern or in earning profit, it was an expense incurred m effecting a permanent improvement in the profit-making machinery and was, therefore, an expenditure on capital account. The expense was on capital account also because it was made, "not only once for all, but with a view to bringing into existence an asset or an. advantage for the enduring benefit of a trade" within the dictum of Viscount Cave in Atherton v. British Insulated and Helsby Cables Ltd. In order that that dictum may apply it is not necessary that by the expenditure a material asset or a permanent right in the nature of capital should be acquired. There may be an expense incurred on capital account though nothing was thereby added to the capital value of an asset. M/S. Sitalpur Sugar Works Ltd vs Commissioner Of Income-Tax, Bihar And ... on 10 April, 1963  1 Atherton v. British Insulated and Helsby Cables Ltd. (1925) 10 T.C 155, Assam Bengal Cement Go. Ltd. v. The Commissioner of Income-tax, West Bengal, [1955] 1 S.C.R. 972, Granite Supply Association Ltd. v Kitton, (1905) 5 T.C. 168 and Bean v. Doncaster Amalgamated Collieries Ltd. (1945) 27 T.C. 296, referred to. 18 An expense would not be on revenue account simply because it was incurred to turn a losing concern into a profitable one. Though the expense incurred by the appellant was of a capital nature, it was not entitled to any depreciation on it under s.10 (2) (vi) of the Income-tax Act because no tangible asset had been acquired by the expenditure which can be said to have depreciated. Neither was the appellant entitled to depreciation under part V of the Form of Return given in the Rules framed under the Act which dealt with a claim for depreciation and by column 3 required a statement to be made for "capital cxpenditure during the year for additions, alternations, improvements and extensions," for to be so entitled to deductions under this part there has to be an improvement of the capital asset or increase in its value and there is no evidence of any such improvement or increase. Further, no claim for depreciation on improvement to capital asset had been made. JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 350 of 1962. Appeal by special leave from the judgment and decree dated November 30, 1960, of the Patna High Court in Miscellaneous Judicial Case No. 799 of 1958. G. S. Pathak and G.G. Mathur, for the appellant. N. D. Karkhanis and R. N. Sachthey, for the respondent. 1963, April 10. The Judgment of the Court' was delivered by SARKAR J.--This case does not seem to us to present any real difficulty. It arises out of a reference to the High Court of Patna of two questions both of which were answered by the High Court against. the assessee, the appellant in this Court. The appellant is. a company manufacturing sugar. It had its factory originally at a place called Sitalpur. That place was found to be disadvantageous for the appellant's business as sugar cane of good quality was not available in sufficient quantity in the neighbourhood and also as it suffered from ravages of flood. With a view to improve its business the appellant removed its factory from Sitalpur to another place called Garaul and in the process of dismantling the building and machinery, transportation from Sitalpur to Garaul and refitting the machinery at the latter place, it incurred a total expense of Rs. 3,19,766/- in the year of account. In the assessment of its income-tax. it claimed a deduction of these expenses as revenue expenses. That claim was rejected. The questions referred concern these expenses. M/S. Sitalpur Sugar Works Ltd vs Commissioner Of Income-Tax, Bihar And ... on 10 April, 1963  2 The first question was this: "Whether the expenditure of Rs. 3, 19,766/-incurred by the assessee m dismantling and shifting the factory from Sitalpur and erecting the factory and fitting the machinery at Garaul was expenditure of a capital nature and not revenue expenditure within the meaning of section 10 (2) (xv) of the Income- tax Act ?" Considering the matter apart from the authorities, it seems to us impossible that the expenditure could be revenue expenditure. It was clearly not incurred for the purpose of carrying on the concern but it was incurred in setting up the concern with a greater advantage for the trade than it had m its.previous set up. The expenditure was .not. recurred m caring any profit but only for putting its factory, that is, its capital, in better shape so that it might produce larger profits, when work.ed. It really .went towards effecting a permanent improvement in the profit making machinery, that is, in the capital assets. It was, therefore, a capital expenditure and not a revenue expenditure. The case, furthermore, is completely governed by authorities. We think it comes clearly within the well- known dictum of Viscount Cave in Atherton v. British Insulated and Helsby Cables Ltd (1). That "when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a 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 to capital". The test formulated by Viscount Cave has been accepted by this Court: see Assam Bengal Cement 6'0. Ltd. v. The Commissioner of Income-tax West Bengal (2). Here the expenditure produced an enduring advantage in the shape of transfer to a better factory site, an advantage which enabled the trade to prosper and an advantage that could be expected to last for ever. It was an expense properly attributable to capital under Viscount Cave'dictum. Mr. Pathak did not question the authority of the test laid down in Atherton's case (1), but said that that test had no application in the present case as it would not apply unless by the expenditure a material asset or a covenant or right in the nature of capital was acquired. We find neither principle nor authority to support this contention. If an expenditure incurred, say for acquiring an additional plant, is capital expenditure, an expenditure incurred in dismantling and refitting the existing plant at a better site would be equally capital expenditure. They would both be capital expenditure because both were incurred for increasing the capacity of the profit making machine to earn profits and neither was incurred for earning the profits themselves. In principle, therefore, there is no reason to make a distinction .as to the nature of the expense between an expenditure incurred for acquiring material capital (1) (1925) 10 T.C. 155. 192, (2) [1955] 1 S.C.R, 972, asset or a legal right in the nature of capital and an expenditure incurred for acquiring any other advantage of an enduring nature for the benefit of the trade. It is true that it has been said, as Mr. Pathak pointed out, that the advantage acquired by the expenditure must be analogous to an asset (see Halsbury's Laws of England, 3rd ed. Vol. XX p. 162.) but that only means advantage of the nature of a capital asset, that is to say, "an advantage to the permanent and enduring benefit of the trade". see ibid p. M/S. Sitalpur Sugar Works Ltd vs Commissioner Of Income-Tax, Bihar And ... on 10 April, 1963  3 161. It is obviously not necessary for an advantage to be of such a nature that it must be the acquisition of a material asset or of a chose in action. As to the authorities, they are all against the view for which Mr. Pathak contends. We propose to refer to two of them only. First, there is the case of Granite Supply Association Ltd. v. Kitton (1). The assessee was a company whose business was to buy and sell granite. It found it necessary to shift to a larger yard and in doing so incurred expenses for removal of stones and cranes from the old to the new yard and for re-erecting the cranes in the latter yard. It was held that the Company was not entitled to a deduction for these expenses. It was said that the expenses were of the same kind as those which might have been incurred in the buying of new cranes. Lord MacLaren said (p. 17IL "I think that the cost' of transferring plant from one set of premises to another more commodious set of premises 'is not an expense incurred for the year in which the thing is done, but for the general interests of the business. It is said, no doubt, that this transference does not add to the capital 'value of the plant, but I think that is not the criterion." Lord MacLaren's observation is completely against the view advocated by Mr. Pathak that to constitute an enduring benefit a material asset or a right must be created. The above case, furthermore, is indistinguishable from the case in hand. Mr. Pathak sought to (1) (1905) 5 T.C.160. distinguish the present case from the Granite Supply Association Ltd. case (1), on the ground that there the business was not running at a loss in the old yard and the expenses were incurred only to enlarge the business and hence were on capital account. We find it difficult to. appreciate this distinction. Whether an expense is on capital account or not would not depend on whether it was incurred for earning larger profits than before nor would an expenditure be on revenue account because it was incurred for turning a losing concern into a profitable one. The other case to which we will refer is Bean v. Doncaster Amalgamated Collieries Ltd.(2). The Colliery Company was required by a statute to incur expenses for remedial works necessary tO obviate loss of efficiency in an existing drainage system due to subsidence caused by the Company's workings. The Drainage Board formed a general drainage improvement scheme and the Company paid a part of the expenses of the new drainage constructed under the scheme. As a result of the new drainage the Company was enabled to work its seams without incurring the liability under the statute as the new drainage system had been so constructed as to remain unaffected by the Company's workings. It was contended by the company that the payment for the new drainage was a revenue expenditure as it had not resulted in the acquisition of any-capital asset, but this contention was rejected and it was held that the expenditure was on capital account and no deduction for it was allowable. Viscount Simon said (p. 312), that the expenses had been incurred "to secure an enduring advantage within the proper application of Lord Cave's phrase in Atherton v. British Insulated and Helsby Cables Ltd. (10 T.C. 155, at page 192)". He also quoted (p.312) with approval the observation of Uthwatt J. in the Court of Appeal that, "The result of the transaction (1) (1905) 5 T.C. 168. (2) (1946) 27 T.C. 296, clearly was that the value of the particular coal measures--a capital asset remaining unchanged in character--was increased both for use and exchange. There was, therefore, as the result of the transaction,brought into existence, not indeed an asset, but an advantage for the enduring benefit of the trade of the Company." Obviously, therefore, there can be an enduring advantage acquired M/S. Sitalpur Sugar Works Ltd vs Commissioner Of Income-Tax, Bihar And ... on 10 April, 1963  4 without an addition to or increase in the value of any capital asset. It is no doubt true that the distinction between revenue expenditure and expenditure on capital is very fine and often it is difficult to decide under which class an expenditure properly falls. No such difficulty, however, arises in the present ease. We think, for the reasons earlier mentioned, that the present is a plain ease and we feel no doubt that the expenses for shifting and re-erection were incurred on capital account. The first question referred was clearly correctly answered by the High Court. The appellant's ease is even weaker with regard to the other question which was this: "Whether the assessee was entitled to claim depreciation on the said expenditure of Rs. 3,19,766/-?" This question was raised presumably on the basis that if in respect of the first question it was held that the expenditure was on capital account, then depreciation should be payable on the amount of the expenditure in the same way as depreciation is allowed on capital. The claim for depreciation was made under s. 10 (2) (vi) of the Income- tax Act. But as the High Court rightly pointed out, no such depreciation could be claimed because no tangible asset had been acquired by the expenditure which could be said to have depreciated. Mr. Pathak, therefore, put the case of the appellant from a slightly different point of view. He referred us to Part V of the Form of Return given in the Rules framed under the Act. That Part deals with a claim for depreciation. Column 3 of this Part requires a statement to be made for "Capital expenditure during the year for additions, alternations, improvements and extensions". Mr. Pathak contended that this Part showed that depreciation is allowable on capital expenditure for improvements, and that in view of our answer to question No. 1. the appellant would be entitled to depreciation on the expense as capital expenses incurred for improvement. This is an obviously fallacious argument. In order to be entitled to deduction on account of depreciation under this Part of the Form, there has to be an improvement of the capital asset, an increase in its value. All that we have here is an expense incurred for acquiring an advantage for the trade. That may or may not be an improvement in the capital assets. The appellant cannot claim depreciation on the amount spent for acquiring an advantage. Whether it could claim depreciation on improvements effected to capital assets is not a question referred to the Court. The second question, therefore, was also correctly answered in the negative by the High Court. This appeal is dismissed with costs. M/S. Sitalpur Sugar Works Ltd vs Commissioner Of Income-Tax, Bihar And ... on 10 April, 1963  5