Aim & object of expenditure would determine character of payment- HC

Brief of the Case: In the case of  Sandvik Asia Limited vs. DCIT, Bombay High Court held that the payment made by the Appellant in its nature is different from a payment made to protect the property. In fact, Supreme Court in the case of Assam Bengal Cement Co. Ltd. v/s. CIT 27 ITR 34 while laying down the criteria to decide/ determine whether the payment is of capital or revenue nature has observed that the aim and object of the expenditure would determine the character of the payment. In the present facts, as pointed out above, the entire aim and object of the payment was not only that the certainty of acquisition is aborted but enduring benefit as pointed out above is obtained by the Appellant. This would conclusively determine that the payment in this case was capital in nature in the capital field.

Facts of the Case: The Appellant is engaged in the business of manufacturing of cutting tools at its factory. The Appellant owned another area of land other than the land on which factory is situated, ad­measuring 47,296 sq. mtrs (the said land) which was vacant at village Aundh in District Pune. In 1976, the Urban Land (Ceiling and Regulation) Act, 1976 (ULCA) was enacted. On 14^th January, 1981, the Appellant applied to the Competent Authority under ULCA for exempting an area of 10,462 sq.mtr. (exempted land) out of the said land under Section 20 of ULCA. Pending consideration of its application for exemption, the State Government issued a notification under Section 41 of the Maharashtra Housing & Area Development Act, 1976 (MHADA) on 3^rd December, 1987, seeking to acquire the said land. Consequent to the above, on 30^th May, 1988, the Appellant made a representation to the State Government and prayed that the proposed acquisition of the said land and the issue of notification under Section 41 of the MHADA be withdrawn. It appears that the State Government treated the Appellant’s representation as an application for exemption under Section 20 of the ULCA and consequently by an order dated 29^th November, 1989, granted exemption to a portion of the said land i.e. the area of 10,462 sq. mtrs, in the aggregate (exempted land). This was with an obligation to construct hostel, training centre and guest house on an area of 6,767 sq. mtrs and also to construct tenements of 50 to 80 sq. mtrs. each for housing to be given to the State Government. The aforesaid exemption to the exempted land was on further payment of consideration of Rs.23.35 lakhs. The Appellant paid the aforesaid amount and also carried out its obligation under the order dated 29^th November, 1989, for availing the exemption granted under Section 20 of ULCA. It is the aforesaid payment of Rs.23.35 lakhs to the State Government that is claimed by the Appellant as the revenue expenditure while arriving at its profit for the A. Y. 1990­91. The Assessing Officer did not accept the Appellant’s claim that the aforesaid payment of Rs.23.35 lakhs was revenue expenditure and held that payment was in the nature of capital expenditure on the following grounds:

(1) The exempted land was not being used for the purpose of business. Thus, the acquisition would not have had any immediate effect on the Appellant’s carrying on business;

(2) The amount of Rs.23.35 lakhs was paid by the Appellant only for perfecting and protecting its title over the exempted land; and

(3) The benefit obtained by making the payment of Rs.23.35 lakhs was a benefit of an enduring nature in respect of the exempted land.

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