1977 (8) TMI 16 - HC - Income Tax

Capital Employed, Capital Expenditure, Capital Or Revenue Expenditure, Computation Of Capital, Income Tax Act, Income Tax Concession, Income Tax Rules, Industrial Undertaking

Issues Involved:

1. Whether the sum of Rs. 12,319 was a capital expenditure not allowable under section 37(1) of the Income-tax Act, 1961.
2. Whether preliminary expenses and share capital issue expenses were includible in working out 'capital employed in the undertaking' within the meaning of section 84 of the Income-tax Act, 1961, read with rule 19 of the Income-tax Rules, 1962.
3. Whether the moiety of the profits was includible in the capital employed in the industrial undertaking having regard to rule 19 of the Income-tax Rules, 1962.
4. Whether the payment of the advance tax under section 212(3) of the Income-tax Act, 1961, was made on March 1, 1963.

Detailed Analysis:

Issue 1: Whether the sum of Rs. 12,319 was a capital expenditure not allowable under section 37(1) of the Income-tax Act, 1961.

The first question relates to the sum of Rs. 12,319 spent by the assessee-company on repairs of an approach road to the factory. The assessee claimed this amount as a revenue expenditure under section 37(1) of the Income-tax Act, 1961. The Income Tax Officer (ITO) rejected the claim, categorizing the expenditure as capital expenditure. The Appellate Assistant Commissioner (AAC) and the Tribunal upheld this decision. The Tribunal noted that the work involved excavations, soling, metalling, grouting, carpeting, and seal coating, which constituted the creation of a new road rather than mere repairs. The Tribunal's factual finding was that the expenditure resulted in an enduring benefit to the assessee, thus qualifying as capital expenditure. The court agreed with this assessment, noting that the work done was not merely repairs but the remaking of the road, resulting in a new road for the factory. The court concluded that the expenditure was capital in nature and disallowed the claim as revenue expenditure.

Issue 2: Whether preliminary expenses and share capital issue expenses were includible in working out 'capital employed in the undertaking' within the meaning of section 84 of the Income-tax Act, 1961, read with rule 19 of the Income-tax Rules, 1962.

The second question involves the inclusion of preliminary expenses and share capital issue expenses, amounting to Rs. 1,27,412, in the computation of 'capital employed in the industrial undertaking' under section 84 of the Income-tax Act, 1961, read with rule 19 of the Income-tax Rules, 1962. The ITO excluded these expenses, considering them unrelated to the industrial undertaking. The AAC and the Tribunal upheld this view, noting that these expenses did not represent tangible assets and were not instrumental in producing profits. The court agreed, stating that such expenses, though shown on the assets side of the balance sheet, are nominal or theoretical and are usually written off when profits are available. The court further noted that these expenses do not fall under clause (d) of rule 19(1) and do not possess any value as assets instrumental in earning profits. Therefore, the court concluded that these expenses should not be included in the capital computation.

Issue 3: Whether the moiety of the profits was includible in the capital employed in the industrial undertaking having regard to rule 19 of the Income-tax Rules, 1962.

The third question was deemed unnecessary to discuss in detail as it was covered by two decisions, one from the Gujarat High Court and the other from the Allahabad High Court. Following the principle of uniformity in fiscal statutes, the court answered this question in the affirmative and in favor of the assessee, based on the cited decisions.

Issue 4: Whether the payment of the advance tax under section 212(3) of the Income-tax Act, 1961, was made on March 1, 1963.

The fourth question pertains to the payment of advance tax and the imposition of penal interest. The ITO charged penal interest of Rs. 1,470.32, presumably under section 216(a) of the Act, without mentioning it in the assessment order. The assessee contended that the provisions of section 212(3) were applicable, having furnished an estimate of advance tax on February 25, 1963, and paid the tax on March 1, 1963. The AAC and the Tribunal found that the payment was actually made on March 2, 1963, based on the date of clearance. The court noted the discrepancy in the rubber stamps on the challan and the date of clearance, concluding that the payment was made on March 2, 1963. Therefore, the court upheld the levy of penal interest, answering the question in the negative and against the assessee.

Conclusion:

The court concluded that the expenditure of Rs. 12,319 was capital in nature, preliminary expenses and share capital issue expenses were not includible in the capital computation, the moiety of the profits was includible in the capital employed, and the payment of advance tax was made on March 2, 1963, justifying the levy of penal interest. The assessee-company was ordered to pay the costs of the reference to the revenue.

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