2013 (12) TMI 1420 - HC - Income Tax

Whether expenditure incurred in excavating a drain to discharge effluents is revenue or capital - Held that - Following Commissioner of Income Tax V/s Glen View Rubber Co. (P) Ltd. 2007 (1) TMI 121 - KERALA High Court - Any expenditure incurred in complying with statutory requirements particularly where the asset concerned would enure to the benefit of the assessee from year to year would necessarily be an asset of enduring nature - Such asset should be categorised as capital expenditure - The mere fact that the land is not owned by the assessee is irrelevant as by excavating the drain through forest land on the basis of approval granted by the Forest Department the assessee has been able to overcome statutory requirements for release of effluents as prescribed under the Pollution Control Act - Expense incurred upon construction of the drain for release of effluents have conferred benefit of an enduring nature upon the assessee - Decided in favour of Revenue. Compensatory afforestation - Held that - The assessee had offered gross amount of interest including TDS to tax in the Assessment year 1992- 93 - The assessee was not allowed credit for the TDS for want of TDS Certificates - The assessee could not obtain TDS certificates - Following Sutlej Cotton Mills Limited v. CIT 1978 (9) TMI 1 - SUPREME Court - What is material is the factors or the circumstances which cause loss and the true nature and character of loss - If the loss occurred during the course of carrying on the business it is incidental to it and hence allowable - The assessee having suffered loss the expenditure had to be allowed as revenue expenditure - Decided against Revenue.

Summary

Issues Involved:

1. Nature of expenditure for excavating a drain: capital or revenue.
2. Allowability of expenditure incurred due to loss of TDS certificates.

Issue-wise Detailed Analysis:

1. Nature of Expenditure for Excavating a Drain: Capital or Revenue

The primary issue in this case revolves around whether the expenditure incurred by the assessee for excavating a drain to discharge effluents is capital or revenue in nature. The assessee, running a paper mill, needed to discharge effluents and sought permission from the Pollution Control Board and the Forest Department to excavate a drain through forest land. The approval was granted under specific conditions, including the transfer of non-forest land to the Forest Department and the payment for compensatory afforestation.

The Assessing Officer treated the expenditure of Rs.70,79,862/- as capital expenditure, arguing that the construction of the drain provided a benefit of enduring nature to the assessee. However, the Commissioner of Income Tax (Appeals) reversed this decision, holding that no capital asset of enduring nature had come into existence as the assessee did not have exclusive rights over the drain. The Income Tax Appellate Tribunal upheld this view, stating that the expenditure was for the purpose of the assessee's business and did not create a capital asset.

The High Court, however, disagreed with the Tribunal's decision. It emphasized that the expenditure incurred for the construction of the drain conferred a benefit of enduring nature to the assessee, as it allowed the discharge of effluents, a statutory requirement for the business. The Court noted that the assessee had exclusive use of the drain, despite not owning the land, and this use would benefit the assessee from year to year. The Court cited various judgments, including "Commissioner of Income Tax V/s Glen View Rubber Co. (P) Ltd.," which held that expenditure incurred to comply with statutory requirements, resulting in an enduring benefit, is capital in nature. The Court concluded that the expenditure was capital, as it created an asset of enduring benefit to the assessee.

2. Allowability of Expenditure Incurred Due to Loss of TDS Certificates

The second issue concerned the allowability of expenditure incurred due to the loss of TDS certificates. The Tribunal had previously found that the assessee had offered the gross amount of interest, including TDS, to tax in the assessment year 1992-93 but was not allowed credit for the TDS due to the lack of TDS certificates. Despite efforts, the assessee could not obtain the certificates, resulting in a loss during the course of business. The Tribunal held that this loss was incidental to the business and, therefore, allowable as revenue expenditure, citing the Supreme Court's judgment in "Sutlej Cotton Mills Limited v. CIT."

The High Court agreed with the Tribunal's findings, noting that the loss occurred during the course of carrying on the business and was incidental to it. Therefore, the expenditure was allowable as revenue expenditure.

Conclusion:

The High Court concluded that the expenditure incurred for the construction of the drain was capital in nature, providing an enduring benefit to the assessee. However, the loss incurred due to the inability to obtain TDS certificates was allowable as revenue expenditure. The appeals were disposed of accordingly.