We contributed to a government fund for developing the roads our raw material travels on. Is that capital expenditure because a road lasts for years?
No. The Supreme Court held the contributions were revenue expenditure. The roads were the Government's before and after the improvement, the assessee bore only part of the cost, and the object was to let sugarcane move more easily from the cane centres to its mills. That is expenditure incurred for running the business with a view to producing profits, not for bringing into existence an asset or advantage of enduring benefit to the assessee. The Tribunal had made no finding that the roads were to be built afresh or that any enduring benefit would accrue. The deduction was allowed.
Decided by the Supreme Court (Supreme Court of India; K.S. Hegde and A.N. Grover JJ. Judgment by Grover J) on 1971-08-27, reported as AIR 1972 SC 159; 1972 Tax LR 51; 1972 AIR 159; AIR 1972 Supreme Court 159. It bears on section 37(1) of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the leading authority for the proposition that money spent on assets you will never own can still be revenue expenditure, and it is used far beyond roads: approach roads, drains, power lines, staff quarters built for others, contributions to public infrastructure. It rejects the argument the High Court accepted, that because building your own road would be capital, contributing to someone else's must be too. Three features of the reasoning do the work: the asset stays with the Government, the assessee met only part of the cost, and the purpose was to make its existing operations run better. The Court also refuses to let the enduring benefit test harden into a rule, saying that in the diverse nature of business operations no single test fits every situation and the question must be looked at from the business point of view on a fair appreciation of the whole situation.
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The assessee was a private company manufacturing and selling sugar, with mills at Maholi and Raja-ka-Sahaspur and its head office at New Delhi. In the accounting period relevant to assessment year 1956-57 it paid Rs 75,000 and Rs 37,500 to the Cane Development Council of the Sugarcane Department of the Uttar Pradesh Government as contributions to a road development fund, for roads between the sugarcane producing centres and its factories. It was obliged to make the contributions under the U.P. Sugarcane Regulation of Supply and Purchase Act, 1953. The roads belonged to the Government before the work and continued to do so afterwards. Its reason for contributing was that better roads would ease the movement of cane to the mills and the flow of supplies to and from its factories, and the expenditure was incurred for commercial expediency and for its day to day business. The revenue authorities and the Tribunal held the contributions to be capital expenditure. On a reference the Delhi High Court agreed, saying that if the assessee had built roads of its own the expenditure would have been capital and it made no difference that these roads were built under compulsion or otherwise.
The appeal was allowed with costs, the High Court's answer discharged, and the question answered in the negative in favour of the assessee. The expenditure was incurred for reasons of commercial expediency, quite apart from the statutory compulsion, and the development of the roads was meant to facilitate the carrying on of the assessee's business. The roads constructed and developed were not the assessee's property, and it was not the Revenue's case that the whole cost was borne by it; it made contributions only. The apparent object was to ease the running of the vehicles and other means used to bring sugarcane to the factory, which was essential to a business whose main raw material was sugarcane. The expenditure therefore fell on the revenue side, being made for running the business with a view to producing profits and not for bringing into existence any asset or advantage of enduring benefit. There was also no finding by the Tribunal that the roads were to be altogether newly made or that an enduring benefit would accrue.
The Court applied the test in Assam Bengal Cement: where expenditure is incurred while the business is being carried on and not for its extension or the substantial replacement of its equipment, it is capital if made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, and revenue if made not for that purpose but for running the business or working it with a view to producing profits. It then took the Calcutta High Court's decision in Hindustan Motors, where a company contributed to repairing a government approach road that had fallen into disrepair and the contribution was held to be revenue. The Revenue tried to confine that case to repairs, on the footing that no enduring advantage arose there. The Court rejected the distinction as unsound, because in the diverse nature of business operations it is difficult to lay down a test applying to all situations, and the criterion must be applied from the business point of view and on a fair appreciation of the whole situation. Looked at that way, the assessee owned nothing at the end of the exercise and had paid only part of the cost of improving roads that carried its raw material. The Court also applied Royal Calcutta Turf Club, where the cost of running a school to train jockeys was allowed because a supply of skilled jockeys was necessary to the club's racing business, the principle being that the expenditure must be for reasons of commercial expediency and incurred for the assessee's business.
the expenditure was incurred for running the business or working it with a view to produce the profits without the assessee getting any advantage of an enduring benefit to itself
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held the contributions were revenue expenditure. The roads were the Government's before and after the improvement, the assessee bore only part of the cost, and the object was to let sugarcane move more easily from the cane centres to its mills. That is expenditure incurred for running the business with a view to producing profits, not for bringing into existence an asset or advantage of enduring benefit to the assessee. The Tribunal had made no finding that the roads were to be built afresh or that any enduring benefit would accrue. The deduction was allowed. This was decided by the Supreme Court (Supreme Court of India; K.S. Hegde and A.N. Grover JJ. Judgment by Grover J) and bears on section 37(1) of the Income Tax Act 1961. It is reported as AIR 1972 SC 159; 1972 Tax LR 51; 1972 AIR 159; AIR 1972 Supreme Court 159. This is the leading authority for the proposition that money spent on assets you will never own can still be revenue expenditure, and it is used far beyond roads: approach roads, drains, power lines, staff quarters built for others, contributions to public infrastructure. It rejects the argument the High Court accepted, that because building your own road would be capital, contributing to someone else's must be too. Three features of the reasoning do the work: the asset stays with the Government, the assessee met only part of the cost, and the purpose was to make its existing operations run better. The Court also refuses to let the enduring benefit test harden into a rule, saying that in the diverse nature of business operations no single test fits every situation and the question must be looked at from the business point of view on a fair appreciation of the whole situation. If it applies to you, the first step is this: Show who owns the asset after the money is spent. If it remains with the Government or a third party and you acquire no right in it, that is the strongest fact you have.
The assessee was a private company manufacturing and selling sugar, with mills at Maholi and Raja-ka-Sahaspur and its head office at New Delhi. In the accounting period relevant to assessment year 1956-57 it paid Rs 75,000 and Rs 37,500 to the Cane Development Council of the Sugarcane Department of the Uttar Pradesh Government as contributions to a road development fund, for roads between the sugarcane producing centres and its factories. It was obliged to make the contributions under the U.P. Sugarcane Regulation of Supply and Purchase Act, 1953. The roads belonged to the Government before the work and continued to do so afterwards. Its reason for contributing was that better roads would ease the movement of cane to the mills and the flow of supplies to and from its factories, and the expenditure was incurred for commercial expediency and for its day to day business. The revenue authorities and the Tribunal held the contributions to be capital expenditure. On a reference the Delhi High Court agreed, saying that if the assessee had built roads of its own the expenditure would have been capital and it made no difference that these roads were built under compulsion or otherwise. The matter was decided on 1971-08-27 by the Supreme Court (Supreme Court of India; K.S. Hegde and A.N. Grover JJ. Judgment by Grover J). On those facts the Supreme Court held as follows. The appeal was allowed with costs, the High Court's answer discharged, and the question answered in the negative in favour of the assessee. The expenditure was incurred for reasons of commercial expediency, quite apart from the statutory compulsion, and the development of the roads was meant to facilitate the carrying on of the assessee's business. The roads constructed and developed were not the assessee's property, and it was not the Revenue's case that the whole cost was borne by it; it made contributions only. The apparent object was to ease the running of the vehicles and other means used to bring sugarcane to the factory, which was essential to a business whose main raw material was sugarcane. The expenditure therefore fell on the revenue side, being made for running the business with a view to producing profits and not for bringing into existence any asset or advantage of enduring benefit. There was also no finding by the Tribunal that the roads were to be altogether newly made or that an enduring benefit would accrue.
The Court applied the test in Assam Bengal Cement: where expenditure is incurred while the business is being carried on and not for its extension or the substantial replacement of its equipment, it is capital if made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, and revenue if made not for that purpose but for running the business or working it with a view to producing profits. It then took the Calcutta High Court's decision in Hindustan Motors, where a company contributed to repairing a government approach road that had fallen into disrepair and the contribution was held to be revenue. The Revenue tried to confine that case to repairs, on the footing that no enduring advantage arose there. The Court rejected the distinction as unsound, because in the diverse nature of business operations it is difficult to lay down a test applying to all situations, and the criterion must be applied from the business point of view and on a fair appreciation of the whole situation. Looked at that way, the assessee owned nothing at the end of the exercise and had paid only part of the cost of improving roads that carried its raw material. The Court also applied Royal Calcutta Turf Club, where the cost of running a school to train jockeys was allowed because a supply of skilled jockeys was necessary to the club's racing business, the principle being that the expenditure must be for reasons of commercial expediency and incurred for the assessee's business. In the words reproduced by the source cited on this page: "the expenditure was incurred for running the business or working it with a view to produce the profits without the assessee getting any advantage of an enduring benefit to itself"
It was decided by the Supreme Court on 1971-08-27 and is reported as AIR 1972 SC 159; 1972 Tax LR 51; 1972 AIR 159; AIR 1972 Supreme Court 159. 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 appeal was allowed with costs, the High Court's answer discharged, and the question answered in the negative in favour of the assessee. The expenditure was incurred for reasons of commercial expediency, quite apart from the statutory compulsion, and the development of the roads was meant to facilitate the carrying on of the assessee's business. The roads constructed and developed were not the assessee's property, and it was not the Revenue's case that the whole cost was borne by it; it made contributions only. The apparent object was to ease the running of the vehicles and other means used to bring sugarcane to the factory, which was essential to a business whose main raw material was sugarcane. The expenditure therefore fell on the revenue side, being made for running the business with a view to producing profits and not for bringing into existence any asset or advantage of enduring benefit. There was also no finding by the Tribunal that the roads were to be altogether newly made or that an enduring benefit would accrue. It arises in Deductions & Disallowances matters, on section 37(1) of the Income Tax Act 1961, and was decided by Supreme Court of India; K.S. Hegde and A.N. Grover JJ. Judgment by Grover 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. Show that you met part of the cost, not all of it, and that the work improved something already there rather than creating it. Frame the purpose as running the existing business better, not as creating a new advantage; here it was the movement of the main raw material to the mills. Pin the Tribunal down on findings of fact. The absence of any finding that the roads were to be newly made or that an enduring benefit would accrue was decisive.
Still good law. The source page records the decision as followed in a line of later cases on contributions to assets not owned by the assessee, and the Court's own approach, that no single test fits every situation and the matter is judged from the business point of view, has been repeatedly applied. Its later history was not separately traced 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.
Until build 87 this library carried a second entry on the same judgment, at /caselaw/case/lakshmiji-sugar-mills-v-cit-road-contribution-revenue/, which asked: I paid a compulsory contribution towards a government road development fund so that cane could reach my mill. Is that revenue expenditure or capital? It was the shorter of the two write-ups and has been merged into this one. That address now redirects here, and every citation, section and subject it carried that this entry did not has been folded in. The judgment allows the deduction under section 10(2)(xv) of the Income-tax Act, 1922; the sections field gives the corresponding provision of the 1961 Act, section 37(1). The headnote on the harvested page gives the second contribution as Rs 37,000 while the judgment and the referred question give Rs 37,500; the judgment's figure is used, and the headnote has otherwise been disregarded. The decision rests on the absence of a Tribunal finding that the roads were newly made, so a case where new roads are built at the assessee's sole cost is not covered by it. Only the second of the two questions referred was in issue before this Court. 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 appeal was allowed with costs, the High Court's answer discharged, and the question answered in the negative in favour of the assessee. The expenditure was incurred for reasons of commercial expediency, quite apart from the statutory compulsion, and the development of the roads was meant to facilitate the carrying on of the assessee's business. The roads constructed and developed were not the assessee's property, and it was not the Revenue's case that the whole cost was borne by it; it made contributions only. The apparent object was to ease the running of the vehicles and other means used to bring sugarcane to the factory, which was essential to a business whose main raw material was sugarcane. The expenditure therefore fell on the revenue side, being made for running the business with a view to producing profits and not for bringing into existence any asset or advantage of enduring benefit. There was also no finding by the Tribunal that the roads were to be altogether newly made or that an enduring benefit would accrue.
TaxSphere, “Lakshmiji Sugar Mills Co P Ltd v CIT”, https://taxnotice.vittsphere.com/caselaw/case/lakshmiji-sugar-mills-v-cit-road-contribution-revenue/ (validity last checked 2026-08-29)
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