M/S. Sitalpur Sugar Works Ltd vs Commissioner Of Income-Tax, Bihar

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 350 of 1962

Decision Date: 10 April 1963

Coram: SARKAR J.

The case was titled M/s. Sitalpur Sugar Works Ltd versus the Commissioner of Income‑Tax, Bihar and Odisha, and it was decided by the Supreme Court of India on 10 April 1963. The petitioner, M/s. Sitalpur Sugar Works Ltd, was a company engaged in manufacturing sugar, while the respondent was the Commissioner of Income‑Tax for the states of Bihar and Odisha. The judgment was delivered by a bench of the Court under the provisions of the Indian Income‑Tax Act, 1922 (11 of 1922), specifically section 10(2)(vi). The central issue concerned whether the expenditure incurred by the company in dismantling its factory at one location and re‑erecting it at another location could be treated as a revenue expense deductible for income‑tax purposes, or whether it constituted a capital expenditure.

According to the facts recorded, the appellant had moved its sugar‑manufacturing plant from its original site, known as Sitalpur, to a new location. In doing so, it incurred a total outlay of Rs 3,19,766 for dismantling its buildings and machinery, transporting the machinery to the new site, and refitting the plant at the new premises. The Court held that this outlay could not be allowed as a deduction under the income‑tax provisions because the expense was not incurred in the ordinary course of carrying on the business or in earning profit. Instead, the expenditure effected a permanent improvement in the profit‑making machinery of the appellant and therefore fell within the category of capital expenditure. The Court explained that the expense was capital in nature because it was incurred “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,” quoting the dictum of Viscount Cave in Atherton v. British Insulated and Helsby Cables Ltd. The Court clarified that the application of this principle did not require the creation of a material asset or a permanent right of a capital nature; an expense could still be capital even if it did not increase the capital value of a specific asset. The judgment referenced several authorities, including 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, to support this view. Moreover, the Court observed that because the expense was of a capital nature, it could not be subject to depreciation under section 10(2)(vi) of the Act, as no tangible asset that could depreciate had been acquired. The Court further noted that the appellant could not claim depreciation under Part V of the Form of Return prescribed by the Rules, which required a statement of “capital expenditure during the year for additions, alterations, improvements and extensions.” For a deduction under this part, there must be an improvement of a capital asset or an increase in its value, which was not shown in the present case.

The record demonstrates that no evidence was placed before the Court showing any improvement or increase in value of the capital asset, and the appellant had not submitted any claim for depreciation on such improvement. The matter before the Court was a civil appeal numbered 350 of 1962, filed by special leave against the judgment and decree dated 30 November 1960 rendered by the Patna High Court in Miscellaneous Judicial Case No. 799 of 1958. Counsel for the appellant consisted of two members of the Bar, while counsel for the respondent was also represented by two advocates. The judgment was pronounced on 10 April 1963 by the learned Judge SARKAR. The Court observed that the appeal did not present any substantial difficulty. The dispute arose from a reference made by the Patna High Court concerning two questions, both of which had been answered against the assessee, who is the appellant in the present proceeding. The appellant is a company engaged in the manufacture of sugar. Originally the company’s sugar‑factory was situated at a place called Sitalpur, a location that proved disadvantageous because the surrounding area failed to supply sufficient quantities of good‑quality sugarcane and was also prone to flooding. In order to improve its business prospects, the company decided to relocate its factory from Sitalpur to a site known as Garaul. During the relocation the company dismantled the building and machinery, transported them from Sitalpur to Garaul, and re‑erected and refitted the machinery at the new site. The total cost incurred for these activities amounted to Rs 3,19,766 in the relevant financial year. In the assessment of its income‑tax, the company claimed that these expenditures should be treated as revenue expenses and therefore be allowed as deductions. The tax authority rejected that claim, leading to the present appeal. The questions referred to the Court concerned the nature of the expenditures incurred in the relocation and whether they could be classified as capital expenditure under section 10(2)(xv) of the Income‑Tax Act.

In addressing the first question, the Court examined whether the amount of Rs 3,19,766 spent on dismantling, shifting, erecting, and fitting the factory and machinery at Garaul constituted capital expenditure rather than revenue expenditure within the meaning of the statutory provision. The Court found that, apart from the authorities, it was impossible to regard the expenditure as revenue in nature. The expense was not incurred for the purpose of merely carrying on the existing business; rather, it was incurred to re‑establish the business at a location that offered a greater advantage for trade than the previous site. The expenditure was not a recurring cost of earning profit but was directed toward placing the factory—its capital—in a better condition so that it could generate larger profits in the future. Consequently, the outlay effected a permanent improvement in the profit‑making machinery, i.e., the capital assets of the company. The Court therefore held that the outlay must be characterised as capital expenditure and not as revenue expenditure. The decision was fully supported by established authority, including the well‑known dictum of Viscount Cave in Atherton v British Insulated and Helsby Cables Ltd, which states that an expenditure made with a view to creating an asset or an enduring advantage for a trade should be treated as capital. The Court concluded that the expenses incurred by the appellant fell squarely within this principle and thus were not allowable as revenue deductions under the cited provision of the Income‑Tax Act.

In this case, the Court observed that when an expense is incurred with the purpose of creating an enduring advantage for a trade, there is a strong reason, absent special circumstances suggesting otherwise, to treat such expense as capital rather than revenue. The test articulated by Viscount Cave in Atherton v. British Insulated and Helsby Cables Ltd (1) has been adopted by this Court, as noted in Assam Bengal Cement (India) Ltd. v. The Commissioner of Income‑tax, West Bengal (2). The Court explained that the expenditure in the present matter produced a lasting benefit in the form of relocation to a superior factory site, an advantage that enabled the business to thrive and was expected to endure indefinitely. Consequently, the expense fell within the capital category under Viscount Cave’s principle. Counsel for the petitioner did not dispute the authority of the Atherton test, but contended that the test should not apply because it would be relevant only where the expenditure resulted in the acquisition of a material asset, covenant, or right of a capital nature. The Court found no principle or authority to support that contention. It explained that if an outlay for acquiring an additional plant is capital, then an outlay for dismantling and re‑erecting the existing plant at a better location is equally capital, because both are incurred to increase the capacity of the profit‑making machinery and are not spent for earning profits directly. Therefore, no distinction should be drawn between an expense incurred to obtain a material asset and an expense incurred to obtain any other enduring advantage for the trade. The Court acknowledged that, as counsel pointed out, some authorities state that the advantage must be analogous to an asset, citing Halsbury’s Laws of England, 3rd ed., vol. XX, p. 162. It clarified that this requirement merely means that the advantage must be of the nature of a capital asset, i.e., a permanent and enduring benefit to the trade, as explained on p. 161 of the same source. The Court emphasized that it is not necessary for the advantage to involve acquisition of a tangible asset or a chose in action. All cited authorities oppose the view advanced by counsel for the petitioner. The Court referred to two principal authorities, beginning with Granite Supply Association Ltd. v. Kitton (1). In that case, the assessee, a company engaged in buying and selling granite, relocated to a larger yard, incurring costs for moving stones and cranes and for reinstalling the cranes at the new site. The Court held that the company was not entitled to a deduction for those expenses.

In the case under consideration, the Court observed that the expenses incurred for moving plant from one set of premises to a more spacious set of premises could not be treated as ordinary yearly expenses. The Court referred to the earlier decision involving Granite Supply Association Ltd., where a company engaged in the purchase and sale of granite had relocated its operations to a larger yard and consequently incurred costs for removing stones and cranes from the old yard and re‑erecting the cranes in the new yard. The Court affirmed that those expenses were not deductible. Lord MacLaren, speaking on page 171 of the report, explained that the cost of transferring plant was “not an expense incurred for the year in which the thing is done, but for the general interests of the business.” He added that although the transference might not increase the capital value of the plant, that fact was not the decisive test. This observation directly contradicted the argument advanced by counsel for the petitioner, who maintained that an enduring benefit required the creation of a material asset or a right. The Court held that the Granite Supply case was materially identical to the present matter, and it dismissed the attempt to distinguish the two on the ground that in the earlier case the business was not operating at a loss in the old yard and that the expenditures were incurred solely to expand the business. The Court found that such a distinction was unpersuasive, noting that whether an expense falls on a capital or revenue account does not hinge on whether it was spent to generate larger profits, nor does it become a revenue expense merely because it helped a losing business become profitable.

The Court also turned to the earlier authority of Bean v. Doncaster Amalgamated Collieries Ltd., reported in 1946 at page 296 of the Tax Cases. In that case a colliery company was statutorily required to fund remedial works to prevent loss of efficiency in an existing drainage system that had been affected by subsidence caused by the company’s mining operations. The Drainage Board introduced a general drainage improvement scheme, and the company contributed a portion of the cost of constructing the new drainage. As a result of the new drainage, the company could continue to work its coal seams without incurring the statutory liability, because the newly built system was designed to remain unaffected by further subsidence. The company argued that the payment for the new drainage should be treated as a revenue expenditure because it did not result in the acquisition of a capital asset. The Court rejected this contention, holding that the expenditure was of a capital nature and consequently not allowable as a deduction. Viscount Simon, on page 312, described the expenses as being incurred “to secure an enduring advantage” and invoked Lord Cave’s phrasing from Atherton v. British Insulated and Helsby Cables Ltd. He also endorsed, with approval, the observation of Justice Uthwatt of the Court of Appeal, which stated that the result of the transaction was to increase the value of the particular coal measures—a capital asset that remained unchanged in character—both for use and for exchange. This reasoning underscored the principle that an enduring advantage may arise without the addition or increase in the value of any capital asset, a point that the Court found applicable to the present case concerning the costs of shifting and re‑erecting machinery.

In this case the Court noted that the authority previously quoted observed that “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.” The Court explained that such a statement shows that an enduring advantage can be obtained without any addition to, or increase in, the value of a capital asset. The Court admitted that the line between revenue expenditure and capital expenditure is often very fine and that it can be difficult to place an expense in the proper class. However, the Court said that no such difficulty arose on the facts before it and that the expense incurred for shifting and re‑erection clearly fell on the capital side. Accordingly, the Court held that the first question referred to the High Court – namely whether the expense was a capital outlay – had been correctly decided by that Court.

The second question before the Court concerned whether the assessee could claim depreciation on the amount of Rs 3,19,766. The appellant apparently relied on the view that, because the expense had been classified as capital, depreciation should be allowable in the same manner as depreciation on capital assets. The claim for depreciation had been made under section 10 (2) (vi) of the Income‑Tax Act. The Court reiterated the observation of the High Court that no depreciation could be claimed because the expenditure did not result in the acquisition of any tangible asset that could itself depreciate. Counsel for the appellant then sought to broaden the argument by referring to Part V of the return form prescribed under the Act. He pointed out that Column 3 of Part V requires a statement of “Capital expenditure during the year for additions, alterations, improvements and extensions” and argued that this column implied that depreciation was allowable on capital expenditure incurred for improvements, and therefore the appellant should be allowed depreciation on the expense in question. The Court rejected this contention as plainly erroneous. It held that a deduction for depreciation under the return form is permissible only where there is an actual improvement in a capital asset that raises its value. Here the expenditure produced merely an advantage for the trade and did not constitute an improvement in any capital asset. Consequently, the appellant could not claim depreciation on the amount spent to obtain that advantage. The Court affirmed that the second question was also correctly answered in the negative by the High Court. Accordingly, the appeal was dismissed with costs.