1979 (2) TMI 57 - HC - Income Tax

Capital Asset, Capital Expenditure, Expenditure Incurred, Income Tax Act, Revenue Expenditure

Summary

Issues:
1. Whether the expenditure incurred for preparing a playground for workers is a revenue expense under sec. 37(1) of the Income-tax Act, 1961?
2. Whether the moiety of book profits is includible in the capital employed in the industrial undertaking as per rule 19(5) of the Income-tax Rules, 1962?

Analysis:

Issue 1:
The assessee had spent Rs. 7,000 to level land for a playground for workers. The Income Tax Officer (ITO) treated it as capital expenditure, considering it an initial expense. The Appellate Assistant Commissioner (AAC) and the Tribunal upheld this decision, stating the expenditure was of a capital nature. However, the court disagreed, noting that no new asset was acquired, and only land leveling was done. The court found no enduring benefit or increase in land value, concluding the expenditure was revenue in nature. The court held that the expenditure was incidental to the company's activities and should be allowed as a revenue expense under sec. 37(1) of the Income-tax Act, 1961.

Issue 2:
The second question regarding the inclusion of book profits in capital employed was answered based on a previous decision for the assessment year 1964-65. The court referred to a detailed discussion in favor of the assessee in a previous case, confirming that the moiety of book profits should be included in the capital employed in the industrial undertaking as per rule 19(5) of the Income-tax Rules, 1962. The court upheld this decision, stating that it was not disputed by the revenue and should be answered in favor of the assessee.

In conclusion, both issues were decided in favor of the assessee. The first issue regarding the playground expenditure was deemed a revenue expense, while the second issue about the inclusion of book profits in capital employed was answered affirmatively based on a previous decision.