Expenditure incurred for preparing a plan for the construction of a building is an expenditure of capital nature and not an allowable deduction in computing the profits and gains of the business.

( 1 ) THE assessee, the State Trading Corporalion of India Limited, a Government Company, incorporated under the Companies Act, 1956, was engaged during the assessment year 1962-63 for which the previous year ended on March 31, 1962, in amongst its other trading activities, the export of low grade iron ore. Supplies were procured from private mine owners. Some of these supplies were to be procured and shipped from the port of Redi in Maharashtra. The present controversy revolves round the assessee s claim for two of his expenditure items mentioned hereinafter, being allowed as revenue expense. The first item relate to the assessee s proposal to construct a building at Lodi Road, which, however, had to be abandoned as the land meant for the building was acquired by the Government. All the same, the assessee had to pay a sum of Rs. 10,000. 00 to Messrs LUC Durrant, Architects, for the preparation of the plan and construction of the building. The assessee claimed this to be revenue expenditure, but the Income-tax officer rejected this claim. The second item relates to the payment by the assessee of a sum of Rs. 2,00,000. 00 to the Maharashtra Government as grant for the development of the Port of Redi. This payment was claimed as part of the total expenditure incurred for facilities to labourers, so as to improve the business of the assessee company. The Income-tax Officer disallowed the claim, as he considered the payment to be in the nature of a loan in the beginning and also because he was of the view that it was not for any specific purpose connected with the assessee s business.

( 2 ) IN appeal, the Appellate Assistant Commissioner also disallowed the payment to the Architects on the ground that the assessee was not engaged in the business of construction of buildings and that in any case, such an expenditure would be of capital nature. The claim for Rs. 2,00,000. 00 was disallowed as the payment was held to be not in any way connected with the business activities of the assessee, nor could it be said to be connected with the purchase of iron ore. The Income-tax Appellate Tribunal in second appeal concurred with the Appellate Assistant Commissioner and disallowed payment to the architects as the amount was expended in connection with and for the construction of a building. The sum of Rs. 2,00,000. 00 was said to be an outright grant. The assessee s claim that this was paid to the Maharashtra Government for the development of the Port and as a grant for mine labour amenities and road development and, therefore, incidental to its business was rejected on the ground that the workers of the port were not employed by the assessee. The Tri bunal was of the view that the amount could not be said to have been expended in connection with the assessee s business, nor was it connected with the price structure of the ore purchased by the assessee or with the quantity exported. The following questions of law arising out of the Tribunal s said order, were then REFERRED TO to the High Court at the instance of the assessee :

" (I) whether on the facts and in the circumstances of the case. the fee of Rs. 10,000. 00 paid by the assessee to Messrs LUC Durrant Architects for the preparation of a plan for construction of a building was an allowable deduction in computing the income under the head profits and gains of the business"? and (ii) whether on the facts and in the circumstances of the case, the payment of Rs. 2,00,000. 00 by the assessee company to the Maharashtra Government can be said to be an expenditure laid out wholly and exclusively for the purposes of the assessee s business in computing the income chargeable under the head profits and gains of the business ?"

( 3 ) A number of authorities have been cited by the counset on both sides in order to indicate the test, which are generally applied for determining whether any particular item of expenditure is in the nature of a Revenue expenditure or an expenditure of capital