2015 (5) TMI 316 - HC - Income Tax

Expenditure incurred for the development of the land - capital expenditure or revenue expenditure - Held that - Main objects of the assessee-appellant company as emerging from the memorandum of association reveals that the appellant company has been set up by the Punjab Government to undertake work of land development, seed multiplication, processing and its distribution and sale. Further, the appellant is empowered to under take, assist and promote operations pertaining to agriculture, horti culture, fisheries, poultry, piggery, sheep and dairy and other related activities. The appellant company is also empowered to process, sale, purchase, import export, etc., and otherwise deal in all kinds of produce of agriculture, horticulture, etc. In sum and substance, the main objectives of the appellant company are to undertake, assist and also carry out operations pertaining to agriculture. Notably, the objectives of the appellant also relate to seed multiplication and diversification of crop pattern in the State to go towards high value and less water intensive crops. Evidently, the Punjab Government has provided the land in question to the appellant on lease to carry out seed multi plication programme. In fact, the annual report and accounts of the appellant company pertaining to the previous year relevant to the assessment year under consideration contain a proclamation of the progress in the diversification through contract farming carried out. It illustrates the new crops promoted and also the increase in the acre age of the crop so grown. By referring to the aforesaid, we are only trying to point out that the objective of the assessee in putting to use the land in question was for the furtherance of its objects of business. Thus the expenditure was revenue in nature. See Empire Jute Co. 1980 (5) TMI 1 - SUPREME Court and Alembic Chemical Works Co. Ltd.'s 1989 (3) TMI 5 - SUPREME Court cases - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the expenditure incurred by the assessee for the development of land is capital expenditure or revenue expenditure.

Issue-Wise Detailed Analysis:

1. Nature of Expenditure: Capital vs. Revenue

The core issue in these appeals is whether the expenditure incurred by the assessee for the development of land should be classified as capital expenditure or revenue expenditure. The Revenue argued that the expenditure was of a capital nature, citing the Supreme Court judgment in CIT v. Madras Auto Service P. Ltd. [1998] 233 ITR 468 (SC). Conversely, the assessee contended, supported by the Supreme Court judgment in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), that the expenses were for tractor hiring charges, jeep vehicle expenditure, staff welfare, HSD, preparation and renewal of seeds, and electricity charges, which were incurred for using the land that was fallow, not barren.

2. Legal Framework and Tests for Determining Nature of Expenditure

The judgment elaborates on the legal framework for determining whether an expenditure is capital or revenue. Under section 37 of the Income-tax Act, 1961, an expenditure qualifies for deduction if it is incurred wholly and exclusively for business purposes and is revenue in nature. The Supreme Court in K. T. M. T. M. Abdul Kayoom v. CIT [1962] 44 ITR 689 (SC) emphasized that there is no rule of thumb for this determination, and each case must be decided on its own facts. The judgment in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) highlighted that there is no conclusive test for distinguishing between capital and revenue expenditure, and each case must be viewed in the context of its specific facts and circumstances.

3. Tribunal's Findings

The Tribunal, referring to the Supreme Court judgments in Alembic Chemicals Works Co. Ltd. and Empire Jute Co. Ltd., outlined several principles for determining the nature of expenditure. These include:
- The test of enduring benefit may break down in some cases.
- Not every advantage of enduring nature is capital expenditure.
- Expenditure facilitating trading operations or efficient business management is revenue expenditure.
- The purpose and effect of the outlay, considered in a business context, are crucial.

The Tribunal examined the Punjab Government's file noting dated July 28, 2005, which indicated that the land was fallow, not barren. The Tribunal concluded that the land required special effort initially but the activities were part of normal farming operations. The expenditure incurred by the assessee, such as tractor hiring charges, jeep vehicle expenditure, staff welfare, HSD, preparation and renewal of seeds, and electricity charges, were for furthering the business objectives and were thus revenue in nature.

4. Application of Legal Principles

The Tribunal applied the legal principles to the facts and found that the expenses were for carrying out normal farming activities. The Tribunal observed that the main objectives of the assessee company, as per its memorandum of association, were related to agriculture, seed multiplication, and crop diversification. The expenses were incurred in furtherance of these objectives and were accounted for in the revenue account. The Tribunal noted that the presence of a gestation period in agriculture operations does not justify treating the expenses as capital expenditure.

5. Dismissal of Revenue's Appeal

The Tribunal's findings were based on an appreciation of evidence and the legal principles laid down by the Supreme Court. The expenses incurred by the assessee were deemed to be revenue expenditure. The Revenue's reliance on Madras Auto Services (P) Ltd. was not found to advance their case. The High Court found no illegality or perversity in the Tribunal's findings and dismissed the appeals, answering the substantial question of law against the Revenue.