R.B. Narain Singh Sugar Mills P. ... vs Commissioner Of Income-Tax, New ...
1980 Latest Caselaw 145 Del

JUDGMENT

S. Ranganathan, J.

1. This is a reference under the I.T. Act, 1961, relating to the assessment years 1964-65 to 1966-67, the previous years in respect of which ended on 31st March, 1964, 31st March, 1965, and 31st March, 1966, respectively. The reference arises out of the income-tax assessments for the above years of M/s. R.B. Narain Singh Sugar Mills Pvt. Ltd. The question that arises in all the three years is the same and has been set out in the following terms by the Tribunal :

"Whether, on the facts and in the circumstances of the case, the disallowance of the expenditures incurred of Rs. 24,000, Rs. 37,000 and Rs. 24,000, respectively, in the assessment years 1964-65, 1965-66 and 1966-67, by way of contribution to intensive cane development scheme, as capital expenditure, was justified in law?"

2. The facts relating to the above matter may be briefly stated. The assessed is a private limited company, carrying on, as its name indicates, the business of manufacture of sugar. In the year 1962, the Govt. of U.P. appointed a high power advisory committee to make recommendations for the improvement of the cultivation of sugarcane. In pursuance of the recommendations made by this committee, the Government formulated a scheme which was introduced in a selected area in which 25 sugar factories were located. The scheme envisaged the carrying out of developmental activities with a view to raise the average yield of sugarcane per acre by about hundred maunds. In order to achieve this object, the scheme contemplated several types of activities such as provision of adequate irrigation facilities, provision of requisite amount of manures and fertilisers, provision of good quality and healthy seeds of approved variety, provision of facilities for inter-culture through distribution of improved implements, control of pests and diseases and provision of transport facilities in order to reduce the time-lag between the harvesting and the crushing of the sugarcane.

3. The finances required for the above scheme were proposed to be shared by the factory and the growers of sugarcane concerned in the particular area. Broadly, the pattern was that 2/3rds of the cost was shared by the Central and the State Govts. equally. The remaining 1/3rd was shared by the beneficiaries, namely, sugar factories on the one hand and the growers of sugarcane on the other, in equal share. For the scheme in this reference, it was estimated that the cost would work out to Rs. 1,44,906 per unit per year. The sugar factory had to contribute Rs. 24,000 and the balance was made up by other contributors. The agency for the implementation of the scheme was the District Cane Officer in respect of overall charge of the scheme and the carrying out of the programme of development was left to be manned by the cane development council. It is to this council that the assessed had contributed Rs. 24,000, Rs. 37,000, and Rs. 24,000, respectively, in the three years in question for the purpose of the above scheme.

4. The expenditure incurred by the assessed was claimed as a deduction for income-tax purposes. This claim was rejected by the ITO, who observed that the amounts could not be regarded as having been exclusively laid down for earning the income or as necessitated by business requirements and disallowed the same. However, on appeal, the AAC took a different view. In his opinion the expenditure had been incurred on grounds of commercial expediency and was, therefore, allowable. The Tribunal, however, reversed the view taken by the AAC and hence the present reference at the request of the assessed.

5. In coming to the conclusion that the amounts in question could not be allowed to be deducted in the computation of income, the Tribunal referred to para. 8 and para. 10 of the scheme. Paragraph 8 of the scheme referred to the fact that thought the chief beneficiaries of the scheme would be the cane-growers; the factory would also benefit through increased supply and better recovery. It was also observed that under this paragraph, the growers were required to enter into a bond to supply all their cane produced to the sugar factory except a small quantity needed for personal purposes. Again, under clause 10 of the scheme, which detailed the expenditure to be incurred under the various heads, there was a reference to expenditure on the boring of wells, the purchase of manures and construction of godowns. The Tribunal held the expenditure in question to be inadmissible, being in the nature of capital expenditure.

6. On behalf of the assessed, Mr. D.S. Randhawa contends that the conclusion of the Tribunal is erroneous and that the expenditure in question was in the nature of revenue expenditure incurred on grounds of commercial expediency which ought to have been allowed. In support of his contention, he relies on the decision of the Supreme Court in the case of Lakshmiji Sugar Mills Co. P. Ltd. v. CIT [1971] 82 ITR 376, and the decision of the Allahabad High Court in the case of Mahabir Sugar Mills (P.) Ltd. v. CIT [1973] 89 ITR 143.

7. In the case before the Supreme Court, the assessed, a sugar factory, had paid to the cane development council certain amounts by way of contribution and this was held allowable as a deduction in computing the profits of the assessed's business. But in that case the contribution had been made to enable the development council to construct and develop roads between various sugarcane producing centres and the sugar factories of the assessed. The expenditure had been incurred under a statutory obligation. The roads remained the property of the Government before and after the improvement. The roads were already in existence and there was no finding that any new roads had to be laid under the scheme. Having regard to these facts, the Supreme Court held that the expenditure had been incurred for facilitating the carrying on of the assessed's business. The court specifically pointed out that the Tribunal did not give any finding that the roads were to be already newly made or that the assessed would get an enduring benefit from these roads.

8. The Allahabad High Court was primarily concerned with the question whether such expenditure can be said to be incidental to business. There also, the court was concerned with a sugar factory and the contributions made by it to the cane development council. This contribution had been made pursuant to a scheme for intensive cane development in the area. The scheme had been launched by the State Govt. on the recommendations of the sugar industry advisory committee and the object of the scheme was to develop intensively an area of four thousand acres around the assessed's sugar mill for a period of three years with a view to raising the average yield of sugarcane per acre. Under the scheme the total cost had to be shared between the factory, the canegrowers, the State Govt. and the Govt. of India. The tribunal in that case appears to have taken contrary decisions in relation to two assessment years, in one year against the assessed and in the second year in favor of assessed. Considering both the references, the Allahabad High Court held that the contributions made by the assessed were deductible as business expenditure. It was pointed out that the mere fact that the scheme had been formulated by the Government did not lead to the inference that in making the payment, the assessed did something which was not expected to benefit its business. It was also held that the fact that the supply of sugarcane would be made by the canegrowers not to the assessed alone but also to certain other factories, could not form a basis for rejecting the claim. It was also held that it was not necessary for the assessed to show that the mills would be closed down in case the development was not undertaken. In coming to its conclusion, the High Court relied on the decision of the Supreme Court which has been earlier referred to as considerably assisting the case of the assessed. It was pointed out that there was no dispute that the sugarcane supplied by the canegrowers to the assessed would result in higher yield of sugar and would, therefore, be of direct benefit to the business carried on by the assessed.

9. It appears to us that the two decisions relied upon by the learned counsel help the present assessed to a considerable extent. The details of the scheme have not been discussed elaborately in the judgment of the Allahabad High Court, but from what has been set out, it would appear that the court was concerned with the same scheme as is under consideration in the present case. Here also the contributions made by the assessed are with a view to improve the cultivation of sugarcane and also to improve the average yield of sugarcane. These objects, though not directly, at least indirectly, facilitated the carrying on of the business by the assessed. There is no doubt that the scheme envisages not only a benefit to the canegrowers but also to the sugarcane factories. As a result of the scheme, the factories were able to have a better and ensured supply of sugarcane and thus to improve their out. It has been suggested that some of the items of expenditure contemplated by the scheme were of lasting advantage to the assessed. But on closer scrutiny, it would be seen that this is not so. The specific items of expenditure in respect of manures, persian wheels and insecticides cannot constitute capital expenditure in any sense of the term. The only doubtful items are in regard to the expenditure envisaged on the boring of wells and construction of godowns and by way of subsidy on culverts, but, as in the case before the Supreme Court, there is nothing in the present case also to show that the expenditure resulted in the creation of any capital asset for the assessed. The wells and culverts had to be constructed on the lands belonging to the canegrowers and there is no material to show that these became the property of the assessed. The assessed has only contributed funds for the implementation of a general scheme in which there were four participants. The scheme itself, as it is seen from the judgment of the Allahabad High Court, was, by way of experimental measure, introduced for a period of three years. The general object of the scheme was only to improve the quality of the sugarcane and to improve the methods of cultivation thereof. The contribution by the assessed was, therefore, made not with the object of acquiring any asset or enduring advantage but only with a view to secure better supply of sugarcane for its factory. In these circumstances and in view of the decisions of the Supreme Court and Allahabad High Court, it is clear that the expenditure must be held to have been wholly and exclusively laid out for the assessed's business and cannot be said to be capital in nature. We, therefore, answer the question which has been referred to us in the negative and in favor of the assessed. The assessed will be entitled to one set of costs in I.T.R. No. 84/62. Counsel's fee Rs. 250.