1968 (5) TMI 14 - HC - Income Tax

Revenue/capital expenditure - Extra shift depreciation allowance - assessee cannot claim extra shift depreciation - contribution made by the assessee-company towards road development - roads are of enduring benefit to the assessee s business and therefore would be capital expenditure

Issues Involved:

1. Calculation of extra shift depreciation allowance for a seasonal factory.
2. Classification of contribution towards road development as capital or revenue expenditure.

Detailed Analysis:

1. Calculation of Extra Shift Depreciation Allowance:

The primary issue was whether the extra shift depreciation allowance for the assessee-company, a seasonal factory, should be calculated based on the actual number of days the extra shifts operated during the previous years (1958-59 and 1959-60). The assessee claimed extra shift depreciation allowance equal to the normal depreciation for machinery and plant used in sugar manufacturing. The Income-tax Officer disallowed part of this claim, which was upheld by the Appellate Assistant Commissioner and the Tribunal.

The relevant legal provision is section 10(2)(vi) of the Indian Income-tax Act, 1922, and rule 8 of the Indian Income-tax Rules, 1922. Rule 8 specifies the conditions and percentages for depreciation allowances, including a note for double and triple shift working. The note indicates that extra allowance for double shift is up to 50% and for triple shift up to 100% of the normal depreciation, proportional to the number of days of extra shift working out of 300 days, considered the normal working days in a year.

The court rejected the assessee's contention that the principle applicable to seasonal factories for normal depreciation should also apply to extra shift depreciation. The court held that the note to clause III of rule 8 explicitly requires the calculation of extra shift depreciation to be proportional to the actual number of days the plant and machinery worked extra shifts. Thus, the Tribunal was correct in disallowing the full amount of 50% of the normal depreciation as extra shift allowance. The first question was answered in the affirmative and against the assessee.

2. Classification of Contribution Towards Road Development:

The second issue was whether the contribution of Rs. 19,220 towards road development was capital expenditure and thus not deductible in computing business income for the assessment year 1959-60. The assessee contributed this amount to a co-operative society formed to develop roads in the area, which would benefit both the assessee's factory and other sugar mills.

The Tribunal and lower authorities classified this expenditure as capital, noting that the roads, although not owned by the assessee, were of substantial construction and provided enduring benefits. The assessee argued that the expenditure was similar to a case involving Hindustan Motors Ltd., where the court held that expenditure on repairing a public road used by the assessee's business was revenue expenditure.

The court distinguished the present case from Hindustan Motors, noting that the latter involved repairs to an existing public road, whereas the present case involved the creation of new roads, providing an enduring benefit. The court cited the principle from Lord Cave in Atherton's case, stating that expenditure bringing into existence an asset or advantage of enduring benefit is typically capital expenditure. The court also referenced the Supreme Court's interpretation in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax and a recent House of Lords decision, emphasizing that enduring benefit does not necessarily mean permanent but must be viewed in the context of the business's needs.

Therefore, the court upheld the classification of the contribution as capital expenditure, answering the second question in the affirmative and against the assessee. The assessee was directed to pay the costs of the reference.

Conclusion:

Both issues were resolved against the assessee. The court affirmed the Tribunal's decisions on the calculation of extra shift depreciation allowance and the classification of the road development contribution as capital expenditure.

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