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1990 Supreme(Kar) 675
IN THE HIGH COURT OF KARNATAKA AT BANGALORE
K. Shivashankar Bhat and S. Rajendra Babu, JJ.
Commissioner of Income Tax —Appellant
Vs.
Mysore Cements Ltd. —Respondent
Income Tax Referred No. 39 of 1984
Decided on : 05-01-1990
Advocate appeared:
Mr. H. Raghavendra Rao, for the Appellant
Mr. G. Sarangan, for the Respondent
The main legal principle established in the judgment is that the nature of expenditure, whether capital or revenue, should be determined based on the specific facts and circumstances of each case, considering the enduring benefit and the nature of the business.
Headnote:
Income Tax Act - Reference - 256(1) - Construction of Quarters - 1961 - [SUMMARY OF ACT SECTIONS REFERENCED AND DISCUSSED]
Fact of the Case:
This is a reference under section 256(1) of the Income Tax Act, 1961, arising out of assessment proceedings for the assessment year 1978-79. The questions required to be answered were related to the nature of certain expenditures claimed by the assessee.
Finding of the Court:
The court found that the expenditure incurred by the assessee for the construction of quarters for its workers was a revenue expenditure and not of capital nature. The court also noted that the assessee was entitled to depreciation on the roads.
Issues: The main issues were whether the construction expenditure was of capital nature and whether the assessee was entitled to depreciation on roads.
Ratio Decidendi: The court considered various agreements, precedents, and the nature of the expenditure to determine whether it was of capital or revenue nature. It emphasized that the test of enduring nature is not conclusive and that each case must be decided based on its own merits.
Final Decision: The court decided in favor of the assessee, allowing the deduction claimed as a revenue expenditure.
K. Shivashankar Bhat, J.—This is a reference under section 256(1) of the Income Tax Act, 1961, arising out of assessment proceedings for the assessment year 1978-79.
2. The questions required to be answered by us are:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 4,12,105 incurred on the construction of quarters for its workers is not of capital nature?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to depreciation on roads?"
3. Learned counsel for the Revenue very fairly and rightly did not pursue the second question before us.
4. The basis of the first question was a claim of the assessee for deduction of a sum of Rs. 4,12,105 being the sum expended by the assessee towards the construction of the workers' quarters.
5. The assessee claimed this sum as part of quarry maintenance expenditure, though incurred towards the constriction of the quarters for the workers at the quarry. The assessing authority, following the decision of the Appellate Assistant Commissioner (issued under section 144B of the Act), held it to be capital expenditure and hence the claim for deduction was disallowed; however, he allowed depreciation on it.
6. The Commissioner of Income Tax (Appeals) accepted the claim of the assessee by following the decision of the Andhra Pradesh High Court in Commissioner of Income Tax Vs. Singareni Collieries Co. Ltd., (1980) 121 ITR 466 AP.
7. The Revenue appealed to the Appellate Tribunal. The Appellate Tribunal held that, (i) the expenditure incurred by the assessee was for the welfare of its employees which was a "normal business expenditure" ; (ii) the assessee did not acquire any capital assets; consequently, the Tribunal upheld the order of the appellate authority in this regard.
8. The Revenue, not being satisfied with the order of the Tribunal, sought this reference.
9. Before proceeding further, it will be useful to refer to an agreement under which those quarters were constructed.
10. A copy of the agreement was placed before us by learned counsel for the assessee; the agreement is dated January 28, 1977, and was entered into between the assessee (referred to therein as "the applicant/the applicants") and the President of India (referred to as the "Government). Broadly, the agreement states that:
For the purpose of constructing tenements for housing persons employed in the limestone/dolomite mining industry, the owners of the mines approached the Central Government for advances for construction of tenements and that the Central Government approved a scheme for construction of law cost housing and for payment of subsidy equivalent to 75% of the estimated total cost of Rs. 6,825 or Rs. 7,925, as the case may be, depending upon the nature of the soil ; if the actual cost of construction is less than the said estimated cost, the subsidy payable by the Government was to be 75% of the actual cost of construction. This cost includes the cost of development, etc., and the type of houses is to be as per the plan attached to the agreement.
11. The owners were required to construct 100 houses at a total cost not exceeding Rs. 10.3 lakhs on their limestone/dolomite mine premises.
12. The agreement is to remain in force for a period of 15 years from the date of completion of the house/houses. Provision was to be made for community facilities by the owners in the area of the construction. The houses so constructed shall be the property of the Central Government as per clause 10 of the agreement. Provision is made for advance payments of the subsidy. If the owners fail to complete the construction, the Central Government may complete the works and recover the owners' part of the cost in terms of the earlier part of the agreement.
13. Where miners are not entitled to any house rent allowance, the rent which the applicant may charge to the allottee for oc
