1997 (3) TMI 67 - HC - Income Tax

Accounting Year, Assessee Carrying On Business, Capital Expenditure, Mines And Quarries, Mining Lease, Revenue Expenditure

Summary

Issues:
Interpretation of expenditure as capital or revenue - Deduction claim for liquidated damages paid for non-operation of leased mines.

Analysis:
The case involved a reference under section 256(1) of the Income-tax Act, 1961, where the Income-tax Appellate Tribunal referred a question regarding the nature of payments made by the assessee to two individuals under lease agreements for mining concessions. The agreements were dated December 13, 1975, and July 14, 1975, respectively. The assessee, engaged in the business of screening and sale of iron ore, claimed deductions for liquidated damages paid to the lessors for non-operation of the mines in the relevant assessment year 1978-79. The Income-tax Officer rejected the deduction claim, deeming the payments as capital expenditure. This decision was upheld by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal, leading to the reference before the High Court.

The High Court considered the nature of the expenditure in question, amounting to Rs. 92,000, paid as liquidated damages for the acquisition of mining leases that were not operated by the assessee. The court noted that the expenditure was related to the acquisition of mining leases and not the operation of the mines, emphasizing that the assessee's business was not mining. Therefore, the court concluded that the expenditure was capital in nature as it was incurred for the acquisition of assets that were not utilized for operational purposes. Consequently, the court upheld the Tribunal's decision, affirming that the payments were capital expenditures.

In light of the above analysis, the High Court answered the question referred to it in the affirmative and in favor of the Revenue. The court disposed of the reference with no order as to costs, thereby affirming the capital nature of the expenditure and denying the deduction claim for liquidated damages paid for the non-operation of the leased mines.