2008 (9) TMI 336 - SC - Income Tax

Revenue Expenditure Versus Capital Expenditure - Nature of expenditure on construction of the open drain for disposal of effluents ITAT allowed the expenditure under the head building account for the construction of drainage for disposal of effluents by treating the same as revenue expenditure HC reversed the order of ITAT held that - framing of a proper substantial question of law is a mandatory requirement under section 260A of the Income-tax - since the High Court has not formulated a correct substantial question of law and since the High Court is required to take into account all the above mentioned facts and circumstances of the case we set aside the impugned order and remit the matter to the High Court for fresh consideration in accordance with law

Summary

Issues:
1. Determination of whether the expenditure incurred on construction of an open drain for disposal of effluents is revenue expenditure or on capital account.

Analysis:

Issue 1:
The main controversy in this civil appeal revolves around the nature of the expenditure amounting to Rs. 70,79,862 incurred by the appellant on constructing an open drain for effluent disposal. The appellant claims it as revenue expenditure, while the Department argues it is on capital account, especially since the appellant debited the building account with the amount. The Commissioner of Income-tax (Appeals) and the Tribunal considered the expenditure as revenue account. However, the Department appealed to the High Court questioning the treatment of the expenditure. The High Court was tasked with determining whether the appellant acquired assets of enduring benefit through the construction of the open drain.

Issue 1 Analysis:
The High Court was required to delve into the terms and conditions under which the Forest Department permitted the construction of the open drain by the appellant. The drain, spanning approximately fourteen kilometers and cutting through forest land, required the appellant to surrender non-forest land in exchange. Additionally, the appellant was obligated to plant trees on both sides of the drain, with afforestation costs to be borne by the appellant. The terms stipulated that the drain must be lined to prevent seepage or leakage of effluent. However, the High Court failed to consider these crucial conditions and implications of forest land diversion while addressing the substantial question of law framed by the Department.

Issue 1 Conclusion:
The Supreme Court emphasized the importance of framing a proper substantial question of law as mandated by the Income-tax Act. Without a correctly framed question, the High Court could not overturn the concurrent findings of the Commissioner of Income-tax (Appeals) and the Tribunal. The Court refrained from expressing any opinion on the case's merits but directed the High Court to reexamine the matter considering all relevant facts and circumstances. Consequently, the Court set aside the High Court's order and remitted the case for fresh consideration in accordance with the law, restoring the Income-tax Appeal to the High Court's file for further proceedings.