1971 (8) TMI 76 - HC - Income Tax

Assessee-company which is a registered firm owned several collieries - This colliery could not be worked for some years by the applicant-firm but expenses had been claimed during the military occupation period on account of minimum royalty payable, the surface rent and small amount of salaries incurred for watch and ward purposes expenditure was only part of the assessee s working expenses and was laid out as part of the process of profit making, therefore, expenditure must be held to be of revenue nature

Issues Involved:
1. Whether the expenditure incurred by the assessee on renovating buildings, reconditioning machinery, and clearing land of debris in South Samla Colliery is capital expenditure or revenue expenditure.

Issue-Wise Detailed Analysis:

1. Nature of Expenditure:
The primary issue in this case is whether the expenditure of Rs. 1,61,742 incurred by the assessee on renovating buildings, reconditioning machinery, and clearing debris in South Samla Colliery is capital expenditure or revenue expenditure. The assessee claimed this amount as business expenditure, but the Income-tax Officer disallowed it, categorizing it as capital expenditure. The assessee appealed, but both the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld the disallowance.

2. Arguments by Assessee:
The assessee argued that the expenditure should be treated as revenue expenditure because it was incurred to put the colliery back into working order after a long period of military occupation. The assessee contended that no new asset was acquired, and the expenditure was necessary to restart operations. The assessee's counsel cited several cases to support the argument that such expenditure should be considered revenue in nature.

3. Arguments by Department:
The department argued that the expenditure was capital in nature because it resulted in an enduring benefit by restoring a non-income-fetching asset to an income-fetching condition. The department's counsel relied on various judicial decisions to support this view, emphasizing that the expenditure was akin to initial expenses for setting up a business or developing it.

4. Judicial Observations:
The court noted that the determination of whether an expenditure is capital or revenue depends on the facts of each case. The court referred to several judicial precedents, emphasizing that the aim and object of the expenditure determine its nature. The court observed that the expenditure in question did not result in the acquisition of any new asset or enduring benefit. Instead, it was incurred to preserve existing assets and remove obstacles to restarting operations.

5. Established Facts:
The court highlighted several key facts:
- The assessee carried on business as owners of various collieries.
- South Samla Colliery was under military occupation from 1942 to 1955.
- The assessee incurred expenses for surface rent, minimum royalty, and staff salaries during the military occupation, which were allowed as business expenditure.
- After derequisition, the assessee incurred Rs. 1,61,742 for renovating buildings, reconditioning machinery, and clearing debris.
- The colliery had not started functioning during the relevant period.

6. Conclusion:
The court concluded that the expenditure did not result in the acquisition of any new asset or enduring benefit. It was incurred to preserve existing assets and remove obstacles to restarting operations. The court held that the expenditure was revenue in nature and should be allowed as a business expenditure. The court answered the question in the negative, against the department and in favor of the assessee.

7. Costs:
The court awarded costs to the assessee, to be paid by the respondent, Commissioner of Income-tax.

Judgment:
The court ruled that the expenditure incurred by the assessee on renovating buildings, reconditioning machinery, and clearing land of debris in South Samla Colliery was revenue expenditure and should be allowed as a business expenditure. The decision was unanimous, with both judges agreeing on the judgment.

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