1976 (1) TMI 10 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal was justified in allowing depreciation at 1/11th of the expenditure as deferred revenue expenditure.
2. Whether the expenditure incurred by the assessee was of capital nature or revenue nature.

Issue-wise Detailed Analysis:

1. Justification of Depreciation at 1/11th of the Expenditure as Deferred Revenue Expenditure:

The Tribunal had allowed depreciation at 1/11th of the expenditure incurred by the assessee, treating it as deferred revenue expenditure. However, the court noted a concession made by the counsel for the assessee, acknowledging that there is no provision for a spreadover of the expenditure in the manner directed by the Tribunal. The court agreed with this concession, stating that the direction given by the Tribunal to calculate the amount claimed as deferred revenue expenditure on a spreadover basis for eleven years is without the slightest justification. Therefore, the Tribunal was not justified in allowing depreciation at 1/11th of the expenditure.

2. Nature of the Expenditure: Capital or Revenue:

The main question was whether the expenditure claimed by the assessee was capital expenditure or revenue expenditure. The assessee had incurred the expenditure under the covenant of a lease to construct masonry structures, which would vest in the lessor upon the lease's expiry. The Income-tax Officer and the Appellate Assistant Commissioner treated the expenditure as capital in nature and rejected the claim for deduction. The Tribunal, however, allowed depreciation on the expenditure, treating it as deferred revenue expenditure.

The court examined several precedents to ascertain the true principle to be applied. The case of Benarsidas Jagannath, In re, provided broad tests for distinguishing capital expenditure from revenue expenditure. The court noted that expenditure is deemed capital when made for the initiation, extension, or substantial replacement of a business. Conversely, expenditure is considered revenue if it is for running the business or working it to produce profits.

In the case of Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, the Supreme Court stated that expenditure for acquiring an asset or advantage for the enduring benefit of the business is capital, while expenditure for running the business is revenue.

The court also referred to the case of Taj Mahal Hotel v. Commissioner of Income-tax, where the Andhra Pradesh High Court held that expenditure incurred for constructing additional rooms in a leased hotel building was capital in nature, as it brought an enduring advantage to the business.

However, the court distinguished the present case from the Taj Mahal Hotel case, noting that the construction undertaken by the assessee was an obligation under the lease covenant. The construction was necessary to keep up the leasehold where the hotel business was being run. Therefore, the expenditure was incurred to maintain the business and was revenue in nature.

The court also considered the case of Travancore Sugars and Chemicals Ltd. v. Commissioner of Income-tax, where the Supreme Court held that payment related to annual profits and not to the capital value of assets was revenue expenditure. Similarly, in the case of Lakshmiji Sugar Mills Co. (P.) Ltd. v. Commissioner of Income-tax, the Supreme Court held that expenditure incurred for facilitating the running of business without gaining an enduring benefit was revenue expenditure.

Applying these principles, the court concluded that the expenditure incurred by the assessee was necessary to keep up the business and was, therefore, revenue expenditure. However, the deduction was admissible only in the year in question, and there could be no spreadover of it.

Conclusion:

The court answered the referred question as follows: "On the facts and in the circumstances of the case, though the Tribunal was not justified in allowing depreciation at 1/11th of the expenditure reckoned with the year of construction as deferred revenue expenditure, the expenditure was of revenue nature." No order as to costs was made.