2006 (11) TMI 187 - HC - Income Tax

Expenditure incurred by the assessee for the construction of drainage for disposal of effluents expenditure in question enabled the assessee to use the drain for all times to come and even to transfer such a right so they are only capital expenditure in respect of TDS assessee was not allowed credit for the TDS for want of TDS Certificates the assessee suffered loss during the course of carrying on the business so these loss was allowable - appeal by revenue is partly allowed

Issues Involved:

1. Whether the expenditure of Rs. 70,79,862 incurred by the assessee on the construction of a drainage pipeline for effluent disposal should be treated as revenue expenditure.
2. Whether the amount of Rs. 2,04,259 being TDS certificates from banks should be allowed as revenue expenditure.

Issue-wise Detailed Analysis:

1. Expenditure on Construction of Drainage Pipeline:

The primary issue was whether the expenditure of Rs. 70,79,862 incurred by the assessee for constructing a drainage pipeline should be treated as revenue expenditure. The assessee, running a paper mill, constructed a drain for effluent disposal and claimed this amount as revenue expenditure. The Assessing Officer disallowed the claim, treating it as capital expenditure, but the Commissioner of Income-tax (Appeals) and the Tribunal allowed it as revenue expenditure.

The Assessing Officer argued that the pipeline provided an enduring benefit to the assessee, who had exclusive rights to use it. The pipeline, being a tangible asset, was capitalized under the 'building account,' and depreciation was allowed.

The Tribunal, however, found that the assessee did not acquire ownership of the land nor unlimited use thereof. The expenditure did not increase the profit-earning capacity of the assessee or provide any enduring benefit in the commercial sense. The Tribunal concluded that the expenditure was necessary for the business and thus allowable as revenue expenditure.

The Revenue contended that the Tribunal's view was erroneous, arguing that the expenditure provided an enduring benefit and a right of enduring nature. The assessee's counsel countered that the "enduring benefit" test is not conclusive and cited various judgments supporting the view that if the advantage merely facilitated business operations, the expenditure would be revenue in nature.

The Court reviewed several judgments, including Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC), Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), and others, which laid down tests for determining whether an expenditure is capital or revenue. The Court noted that the enduring benefit test, while relevant, is not conclusive. The acquisition of an asset or a right of permanent character is a significant factor.

Applying these principles, the Court concluded that the expenditure incurred by the assessee for constructing the drainage pipeline was capital in nature. The right to discharge effluents through the pipeline provided an enduring benefit and was not merely a facility for carrying on the business. The expenditure enabled the assessee to use the drain indefinitely and even transfer such a right, thus satisfying the object test.

The question was answered in favor of the Revenue, holding that the expenditure was capital in nature.

2. TDS Certificates from Banks:

The second issue was whether the amount of Rs. 2,04,259, being TDS certificates from banks, should be allowed as revenue expenditure. The Tribunal found that the assessee had offered the gross amount of interest, including TDS, to tax but was not allowed credit for the TDS for want of certificates. Despite efforts, the assessee could not obtain the TDS certificates, resulting in a loss during the course of business.

The Tribunal, relying on the judgment in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC), held that the loss occurred during the course of carrying on the business and was incidental to it, thus allowable as revenue expenditure.

The Court upheld the Tribunal's finding, concluding that the expenditure had to be allowed as revenue expenditure. The question was answered against the Revenue and in favor of the assessee.

Conclusion:

The appeal was partly allowed. The expenditure on the construction of the drainage pipeline was held to be capital in nature, while the amount related to TDS certificates was allowed as revenue expenditure.

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