1981 (9) TMI 102 - HC - Income Tax

Summary

Issues Involved:
1. Whether the amount contributed by the assessee towards the black topping of the approach road in the Sembiam Estate was a revenue expenditure for the assessment year 1969-70.
2. Whether the relief under section 80E/80-1 should be allowed before setting off the business loss and development rebate relating to earlier years.

Detailed Analysis:

Issue 1: Revenue Expenditure for Black Topping of Road
- Facts and Background: The assessees operated factories in the Sembiam Estate, owned by Simpson & General Finance Co. Ltd. The company periodically incurred expenses for black topping the approach road. The expenditure for the year was Rs. 3,50,000, allocated among various companies, including Rs. 80,500 for M/s. Tractors and Farm Equipments Ltd., Rs. 26,900 for Bimetal Bearings Ltd., and Rs. 36,750 for Addison Paints & Chemicals Ltd. The assessees claimed these amounts as revenue expenditure.
- Assessment and Appeals: The Income Tax Officer (ITO) disallowed the claims, stating the roads were not the assessees' properties and depreciation could not be granted. The Appellate Assistant Commissioner (AAC) allowed the claims, citing the expenditure facilitated the smooth running of day-to-day business. The department appealed to the Tribunal, which upheld the AAC's decision, concluding the expenditure was revenue in nature as no new road was constructed.
- Legal Precedents:
- Lakshmiji Sugar Mills Co. P. Ltd. v. CIT: The Supreme Court allowed the expenditure as revenue, emphasizing it facilitated business operations without providing an enduring benefit.
- Travancore-Cochin Chemicals Ltd. v. CIT: The Supreme Court deemed the expenditure capital in nature as it provided an enduring advantage by constructing a new road.
- L. H. Sugar Factory and Oil Mills (P.) Ltd. v. CIT: Distinguished between contributions made without legal obligation and those facilitating business operations, allowing the latter as revenue expenditure.
- Court's Analysis: The court differentiated the present case from Travancore-Cochin Chemicals, noting no new road was constructed, and the black topping was akin to maintenance, not creating an enduring asset. The court emphasized the nature of the advantage in a commercial sense and concluded the expenditure was revenue in nature.
- Decision: The court affirmed the Tribunal's decision, allowing the expenditure as revenue expenditure.

Issue 2: Relief Under Section 80E/80-1 Before Setting Off Losses
- Facts and Background: The Tribunal followed decisions from the Kerala and Mysore High Courts, allowing relief under sections 80E/80-1 before setting off business loss and development rebate from earlier years.
- Legal Precedents:
- Cambay Electric Supply Industrial Co. v. CIT: The Supreme Court held that unabsorbed depreciation and development rebate must be deducted before computing the profits for section 80E relief.
- CIT v. Rane Brake Linings Ltd. and CIT v. English Electric Co. Ltd.: The Madras High Court followed the Supreme Court's decision in Cambay Electric Supply.
- Court's Analysis: The court found no new points to consider and applied the Supreme Court's decision in Cambay Electric Supply.
- Decision: The court answered the questions in the negative, ruling in favor of the revenue, indicating that relief under section 80E/80-1 should not be allowed before setting off the business loss and development rebate.

Conclusion:
The court ruled in favor of the assessees on the first issue, allowing the black topping expenditure as revenue expenditure. On the second issue, the court ruled in favor of the revenue, requiring the setting off of business loss and development rebate before allowing relief under section 80E/80-1. Costs were awarded to the assessees.