I built a water supply system for the local town and handed it to the municipality, and in return my factory stays outside municipal limits for fifteen years. Is that spending deductible?
Yes. The Supreme Court held the expenditure was on revenue account and deductible. Nothing was added to the company's capital assets and its capital structure was unchanged: the pipelines and installations belonged to the municipality, not to the company. The only advantage the company got was immunity, under normal conditions, from municipal rates and taxes for fifteen years - and had those rates been payable they would have been revenue outgoings, so the advantage lay in the field of revenue and not of capital. Applying Empire Jute, an enduring advantage does not by itself make expenditure capital. The Revenue's appeal was dismissed with costs.
Decided by the Supreme Court (Supreme Court of India - R.S. Pathak, CJ and M.H. Kania, J (judgment by Kania, J)) on 1988-05-04, reported as (1988) 172 ITR 257 (SC); 1988 Supp SCC 378; 1988 SCR (3) 917; JT 1988 (2) 287. It bears on section 37(1) of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the Supreme Court's clearest application of the proposition that the enduring benefit test can break down. Two working rules come out of it, both used constantly. First, look at what the advantage saves: if the liability avoided would itself have been a revenue outgoing, the advantage is in the revenue field however long it lasts. Second, look at who owns what the money built: expenditure that creates an asset in someone else's hands, leaving the payer's fixed capital untouched, does not become capital merely because a structure has come into existence. Taken together they cover the very common case of a business that funds public infrastructure - roads, water, power lines - in return for a commercial concession.
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The assessee manufactured cement at factories across the country, one of them at Shahabad, then in the State of Hyderabad. In September 1956 the Government decided to bring the area in which the factory stood within the limits of the Shahabad Town Municipality. By a tripartite agreement of 30 October 1956 between the Government, the company and the municipality, the company undertook to supply water to the town and village, to put up a high tension transmission line and supply electricity for street lighting, and to concrete the main road from the factory to the railway station free of charge. It agreed to complete the water supply scheme at its own cost, laying the main pipelines. It was to own the pipelines and installations within and just outside its premises; the municipal committee was to take over and own the rest and maintain them. By clause 23, in consideration of these amenities, the Government undertook not to include the factory, main workshop, housing colony, quarries and limestone lands within municipal or panchayat limits for fifteen years. In the previous year ending 31 July 1958 the company spent Rs 2,09,459 on pipelines and installations that became the municipality's, and claimed it for assessment year 1959-60.
The Revenue's appeal was dismissed with costs, and the Bombay High Court's answer in favour of the assessee stood. The expenditure was on revenue account and deductible. The water pipelines on which it was incurred were not assets of the assessee but of the Shahabad Municipality, so the expenditure did not bring any capital asset of the company into existence; there was no addition to its capital assets and no change in its capital structure. The only advantage the company derived was absolution or immunity, under normal conditions, from the levy of certain municipal rates, taxes and charges for fifteen years. Had those liabilities fallen to be paid they would have been payments on revenue account, so the advantage secured was in the field of revenue and not of capital. The Revenue's argument that a fifteen-year immunity was an advantage of an enduring nature, and therefore capital, was rejected. It was not disputed before the Tribunal that the whole expenditure had been laid out for the purposes of the business; the only question was its character.
The Court took the two limbs of the Revenue's case in turn. On the first, whether a capital asset had come into existence, the agreement itself supplied the answer: title to the pipelines and installations outside the company's own premises passed to the municipality, which was also to maintain them. Assets built at the company's cost but owned by another are not the company's capital assets, and its own fixed capital was untouched. On the second, the enduring benefit argument, the Court applied Empire Jute. The dictum of Viscount Cave in Atherton - that expenditure made once and for all with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade is properly attributable to capital - is not a universal rule; there may be cases where expenditure incurred for an advantage of enduring benefit is nonetheless on revenue account, and the test then breaks down. What matters is the nature of the advantage in a commercial sense, and only an advantage in the capital field makes the expenditure disallowable. Where the advantage merely facilitates trading operations or lets the business be conducted more effectively or profitably while leaving the fixed capital untouched, the expenditure is revenue even if the advantage endures indefinitely. Applying that here, the advantage was freedom from municipal rates and taxes. Those rates, if levied, would have been deductible revenue outgoings year by year, which places the whole advantage in the revenue field, and the fifteen-year term does not change its character.
If these liabilities had to be paid, the payments would have been on revenue account and hence the advantage secured was in the field of revenue and not capital.
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Handle my notice → Ask a CA on WhatsAppYes. The Supreme Court held the expenditure was on revenue account and deductible. Nothing was added to the company's capital assets and its capital structure was unchanged: the pipelines and installations belonged to the municipality, not to the company. The only advantage the company got was immunity, under normal conditions, from municipal rates and taxes for fifteen years - and had those rates been payable they would have been revenue outgoings, so the advantage lay in the field of revenue and not of capital. Applying Empire Jute, an enduring advantage does not by itself make expenditure capital. The Revenue's appeal was dismissed with costs. This was decided by the Supreme Court (Supreme Court of India - R.S. Pathak, CJ and M.H. Kania, J (judgment by Kania, J)) and bears on section 37(1) of the Income Tax Act 1961. It is reported as (1988) 172 ITR 257 (SC); 1988 Supp SCC 378; 1988 SCR (3) 917; JT 1988 (2) 287. This is the Supreme Court's clearest application of the proposition that the enduring benefit test can break down. Two working rules come out of it, both used constantly. First, look at what the advantage saves: if the liability avoided would itself have been a revenue outgoing, the advantage is in the revenue field however long it lasts. Second, look at who owns what the money built: expenditure that creates an asset in someone else's hands, leaving the payer's fixed capital untouched, does not become capital merely because a structure has come into existence. Taken together they cover the very common case of a business that funds public infrastructure - roads, water, power lines - in return for a commercial concession. If it applies to you, the first step is this: Ask what the outlay bought and price the benefit: if it removes a liability that would have been charged to revenue, say so, because that is what put this case in the revenue field.
The assessee manufactured cement at factories across the country, one of them at Shahabad, then in the State of Hyderabad. In September 1956 the Government decided to bring the area in which the factory stood within the limits of the Shahabad Town Municipality. By a tripartite agreement of 30 October 1956 between the Government, the company and the municipality, the company undertook to supply water to the town and village, to put up a high tension transmission line and supply electricity for street lighting, and to concrete the main road from the factory to the railway station free of charge. It agreed to complete the water supply scheme at its own cost, laying the main pipelines. It was to own the pipelines and installations within and just outside its premises; the municipal committee was to take over and own the rest and maintain them. By clause 23, in consideration of these amenities, the Government undertook not to include the factory, main workshop, housing colony, quarries and limestone lands within municipal or panchayat limits for fifteen years. In the previous year ending 31 July 1958 the company spent Rs 2,09,459 on pipelines and installations that became the municipality's, and claimed it for assessment year 1959-60. The matter was decided on 1988-05-04 by the Supreme Court (Supreme Court of India - R.S. Pathak, CJ and M.H. Kania, J (judgment by Kania, J)). On those facts the Supreme Court held as follows. The Revenue's appeal was dismissed with costs, and the Bombay High Court's answer in favour of the assessee stood. The expenditure was on revenue account and deductible. The water pipelines on which it was incurred were not assets of the assessee but of the Shahabad Municipality, so the expenditure did not bring any capital asset of the company into existence; there was no addition to its capital assets and no change in its capital structure. The only advantage the company derived was absolution or immunity, under normal conditions, from the levy of certain municipal rates, taxes and charges for fifteen years. Had those liabilities fallen to be paid they would have been payments on revenue account, so the advantage secured was in the field of revenue and not of capital. The Revenue's argument that a fifteen-year immunity was an advantage of an enduring nature, and therefore capital, was rejected. It was not disputed before the Tribunal that the whole expenditure had been laid out for the purposes of the business; the only question was its character.
The Court took the two limbs of the Revenue's case in turn. On the first, whether a capital asset had come into existence, the agreement itself supplied the answer: title to the pipelines and installations outside the company's own premises passed to the municipality, which was also to maintain them. Assets built at the company's cost but owned by another are not the company's capital assets, and its own fixed capital was untouched. On the second, the enduring benefit argument, the Court applied Empire Jute. The dictum of Viscount Cave in Atherton - that expenditure made once and for all with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade is properly attributable to capital - is not a universal rule; there may be cases where expenditure incurred for an advantage of enduring benefit is nonetheless on revenue account, and the test then breaks down. What matters is the nature of the advantage in a commercial sense, and only an advantage in the capital field makes the expenditure disallowable. Where the advantage merely facilitates trading operations or lets the business be conducted more effectively or profitably while leaving the fixed capital untouched, the expenditure is revenue even if the advantage endures indefinitely. Applying that here, the advantage was freedom from municipal rates and taxes. Those rates, if levied, would have been deductible revenue outgoings year by year, which places the whole advantage in the revenue field, and the fifteen-year term does not change its character. In the words reproduced by the source cited on this page: "If these liabilities had to be paid, the payments would have been on revenue account and hence the advantage secured was in the field of revenue and not capital."
It was decided by the Supreme Court on 1988-05-04 and is reported as (1988) 172 ITR 257 (SC); 1988 Supp SCC 378; 1988 SCR (3) 917; JT 1988 (2) 287. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 37(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeal was dismissed with costs, and the Bombay High Court's answer in favour of the assessee stood. The expenditure was on revenue account and deductible. The water pipelines on which it was incurred were not assets of the assessee but of the Shahabad Municipality, so the expenditure did not bring any capital asset of the company into existence; there was no addition to its capital assets and no change in its capital structure. The only advantage the company derived was absolution or immunity, under normal conditions, from the levy of certain municipal rates, taxes and charges for fifteen years. Had those liabilities fallen to be paid they would have been payments on revenue account, so the advantage secured was in the field of revenue and not of capital. The Revenue's argument that a fifteen-year immunity was an advantage of an enduring nature, and therefore capital, was rejected. It was not disputed before the Tribunal that the whole expenditure had been laid out for the purposes of the business; the only question was its character. It arises in Deductions & Disallowances matters, on section 37(1) of the Income Tax Act 1961, and was decided by Supreme Court of India - R.S. Pathak, CJ and M.H. Kania, J (judgment by Kania, J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Establish who owns the asset created; where title vests in a municipality or other authority, put the agreement clause on record. Meet the enduring benefit argument on Empire Jute lines - the advantage must be in the capital field, not merely long-lasting. Do not let the department carve out the part of the works that stays in your ownership; here the Tribunal had allowed only the part that did not make the company an owner, and the Court allowed the whole of the expenditure on the municipality's assets.
Still good law. I read the whole judgment to its dismissal of the appeal. It applies the Court's decision in Empire Jute and the qualification that decision placed on the Atherton test. I checked no later authority in this session. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The appeal was decided under section 10(2)(xv) of the Indian Income-tax Act, 1922, which is the predecessor of section 37(1) of the 1961 Act; I have listed the current section, and a reader should note that the words construed are those of the older provision. The judgment deals only with the water supply work, since that was the only part performed in the year in question, and says nothing about the electricity line or the road. The harvested page carries a reporter's headnote above the judgment, which I have not used. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeal was dismissed with costs, and the Bombay High Court's answer in favour of the assessee stood. The expenditure was on revenue account and deductible. The water pipelines on which it was incurred were not assets of the assessee but of the Shahabad Municipality, so the expenditure did not bring any capital asset of the company into existence; there was no addition to its capital assets and no change in its capital structure. The only advantage the company derived was absolution or immunity, under normal conditions, from the levy of certain municipal rates, taxes and charges for fifteen years. Had those liabilities fallen to be paid they would have been payments on revenue account, so the advantage secured was in the field of revenue and not of capital. The Revenue's argument that a fifteen-year immunity was an advantage of an enduring nature, and therefore capital, was rejected. It was not disputed before the Tribunal that the whole expenditure had been laid out for the purposes of the business; the only question was its character.
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