1982 (2) TMI 111 - AT - Income Tax

Summary

Issues Involved:
1. Whether the dead rent paid by the assessee constitutes capital expenditure or revenue expenditure.
2. Whether the income of the company qualifies for exemption under section 11 of the Income-tax Act, 1961.
3. Whether depreciation on forest roads is allowable.

Detailed Analysis:

1. Dead Rent: Capital Expenditure or Revenue Expenditure

The primary issue was whether the dead rent paid by the assessee should be treated as capital expenditure or revenue expenditure. The assessee argued that the dead rent should be treated as revenue expenditure, citing the case of Gotan Lime Syndicate (1966) 59 ITR 718 (SC). However, the authorities below disallowed the dead rent, treating it as capital expenditure. The ITO reasoned that the dead rent represented consideration money for obtaining the right of development, extraction of forest produce, and replantation, thus constituting capital expenditure.

The Commissioner (Appeals) upheld the ITO's view, distinguishing the facts of the present case from those in Gotan Lime Syndicate. The Commissioner observed that the dead rent in this case was referable to the acquisition of the lease itself and not related to the quantum or value of the timber extracted.

Upon appeal, the Tribunal examined the nature of the expenditure, the nature of the right acquired, and their relation inter se. The Tribunal concluded that the dead rent was related to acquiring the sole right to exploit the leased forest land, manage and administer the entire forest area, and develop various facilities. This right constituted the profit-earning apparatus of the assessee-company and was not directly co-relatable with the procurement of raw materials. Therefore, the dead rent was deemed a capital expenditure.

2. Exemption under Section 11 of the Income-tax Act, 1961

The assessee contended that its income was exempt under section 11 of the Income-tax Act, 1961, arguing that the company's object was not to earn income but to develop forest areas, which was a charitable object. However, the Tribunal, supporting the Revenue's view, noted that the company's main purpose was to develop forests, extract forest produce, and sell them. The Articles of Association also provided for the declaration of dividends, indicating that the company was incorporated to earn profit. Therefore, the claim for exemption under section 11 was not upheld.

3. Depreciation on Forest Roads

The final issue was whether depreciation on forest roads was allowable. The assessee argued that the roads represented buildings on which depreciation was allowable, citing the decision of the Calcutta High Court in Indian Aluminium Co. Ltd. v. Commissioner (1980) 122 ITR 660 (Cal). The Tribunal agreed with the assessee, concluding that the roads built in the forest area were covered by the definition of "buildings" and were depreciable. Consequently, the claim of depreciation was upheld.

Conclusion:

The Tribunal affirmed the decision of the Commissioner (Appeals) on the issue of dead rent, holding it to be capital expenditure. The claim for exemption under section 11 was rejected. However, the Tribunal allowed the claim of depreciation on forest roads, partially succeeding the assessee's appeals.