JUDGMENT
Kania, Actg. C.J.
1. These are three references arising on a consolidated statement of the case submitted by the Income-tax Appellate Tribunal under section 256(1) of the Income-tax Act, 1961.
2. The questions which have been referred to us for our determination arejas follows :
“(1) Assessment years 1965-66 to 1967-68. – Whether the claim of the assessee that 50% of the profits earned in the computation period should be included in the computation of its capital employed for the purpose of section 84 of the Income-tax Act, 1961, has been rightly rejected ?
(2) Assessment year 1967-68. – Whether the claim of the assessee to deduct the sum of Rs. 12,188 being the expenditure on the boring of wells at the new factory site at Borivli has been rightly rejected on the ground that it was capital expenditure ?”
3. As the questions themselves make it clear, question No. (1) pertains to the assessment years 1965-66 to 1967-68. As far as question No. (1) is concerned, it is agreed between counsel that in view of the decision of a Division Bench of this court in Income-tax Reference No. 73 of 1971 decided on April 24, 1980, the said question will have to be answered in the affirmative and against the assessee. Question No. (1) is answered accordingly without any further discussion.
4. As far as question No. (2) is concerned, the relevant previous year relating to the assessment year 1967-68 was the financial year ending on March 31, 1967. The assessee-company carries on the business of embroidering cotton cloth and art silk cloth, including saris, blouse pieces, etc. These facts can be gathered from the order of the Income-tax Officer. During the relevant previous year, the assessee attempted to install a bore well at its new factory site at Borivli. The attempt of the assessee to bore the well, however, failed and the dispute relates to the question as to whether the amount of Rs. 12,188 being the expenditure incurred by the assessee in attempting to bore the well was a capital expenditure or a revenue expenditure, it being the agreed position that the assessee would be entitled to deduct the same in computing its profits if it was held to be a revenue expenditure.
5. In our view, on a plain consideration of facts, it is clear that the expenditure in question was capital expenditure. The expenditure was incurred by the assessee in trying to bore a well. There can be little dispute that had the well been successfully bored, it would have added to the fixed capital of the assessee and would have become a part of its capital assets. As the expenditure was incurred in attempting to obtain a capital asset by boring the well, there can be little doubt that the expenditure was in the nature of capital expenditure.
6. The submission of Mr. Mehta, learned counsel for the assessee, however, was that the expenditure in question did not relate to the framework of the business of the assessee and, therefore, it was not a capital expenditure but a revenue expenditure. In support of this submission, Mr. Mehta placed reliance on the decision of the Supreme Court in Empire Jute Co. Ltd. v. CIT . In that case, the appellant, being the assessee-company, carried on the business of manufacture of jute and was a member of the Indian Jute Mills Association, which was formed with the object, inter alia, of protecting the trade of its members imposing restrictive conditions on the conduct of the trade and adjusting the production of the mills of its members. A working time agreement was entered into between the members restricting the number of working hours per week for which the mills were entitled to work their looms. Under clause 6(b) of the said agreement, it was provided that the signatories members would be entitled to transfer in part or whole their allotment of hours of work per week to any one or more of the other signatories. Under this clause, the appellant purchased “loom hours” from four other mills forjthe aggregate sum of Rs. 2,03,255 during the relevant previous year claimed to deduct that amount as revenue expenditure. On a reference, the High Court took the view that the said expenditure was in the nature of capital expenditure and was, therefore, not deductible under section 10(2)(xv) of the Indian Income-tax Act, 1922. Reversing the decision of the High Court, the Supreme Court took the view that the allotment of loom hours under the working time agreement to different mills constituted not a right conferred but merely a contractual restriction on the right of every mill to work its looms to their full capacity, and purchase of loom hours by a mill had, therefore, the effect of relaxing the restriction on the operation of looms to the extent of the number of working hours per week transferred to it so that the transferee-mill could work its looms for longer hours than permitted under the working time agreement and increase its profitability. It was held by the supreme Court that the acquisition of additional loom hours did not add to the fixed capital of the appellant; the permanent structure of which the income was the product or fruit remained the same; it was not enlarged nor did the appellant acquire a source of profit or income when it purchased the loom hours. It was observed by the Supreme Court the the test of enduring benefit was, therefore, not a certain or conclusive test and it could not be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. We totally fail to see how this decision advances the argument or Mr. Mehta in any way. The decision of the Supreme Court makes it clear that acquisition of additional loom hours did not add to the fixed capital of the appellant-assessee, and it was because of the said reason that it was held that the expenditure incurred in securing the said loom hours did not constitute capital expenditure but was in the nature of revenue expenditure. In the present case, as we have pointed out, had the well been bored, it would undoubtedly have been a part of the fixed capital of the assessee and, hence, on the principles laid down by the Supreme Court in the aforesaid case, the expenditure incurred in attempting to bore the well must be regarded as capital expenditure.
7. Mr. Mehta next relied on the decision of a Division Bench of this court in CIT v. National Rayon corporation [1985] 155 ITR 413, where it has been held that unless an expenditure is directly related to a capital asset, acquired or to be acquired in the near future, it cannot be said to have brought about an enduring benefit or a capital nature. In that case, the expenditure related to the visit abroad of the managing director and works manager of the assessee-company. The principal purpose of the visit was to reduce the foreign exchange component in the expenditure to be incurred in setting up the nylon yarn plant. The Division Bench took the view that the expenditure incurred for the aforesaid visit did not relate directly to the setting up of the nylon yarn plant but to the reduction of foreign exchange liability in setting it up and hence it was revenue expenditure. The principle laid down in that case can have no application to the case before us, because in the present case the expenditure directly related to an attempt to bore the well which would have been a capital asset of the assessee had the attempt succeeded.
8. Mr. Devadhar, learned counsel for the respondent, has drawn our attention to the decision of the Allahabad High Court in CIT v. Bazpur Co-operative Sugar Factory Ltd. . We find that the Allahabad High Court has taken the same view as the one we have taken in this case, as we have already set out earlier.
9. In the result, question No. (2) is answered in the affirmative and against the assessee. The assessee to pay the costs of this reference.