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1982 Supreme(Cal) 314
High Court Of Calcutta
DIPAK KUMAR SEN, C. K. BANERJEE
INDIAN EXPLOSIVES LTD. - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 301 Of 1974
Decided On : 08/30/1982
Expenditure incurred for the construction of an asset or a right of a permanent character, resulting in an enduring benefit to the assessee, is considered capital expenditure.
Headnote:
EXPENDITURE - Capital vs. Revenue - Construction of airstrip for business convenience - Acquisition of enduring benefit - Interest on overdraft - Proportionate disallowance - Business necessity.
Fact of the Case:
The assessee company constructed an airstrip on land leased from a corporation for the convenience of its executives. The construction cost was debited to the assessee's miscellaneous expenses account and written off successively in its profit and loss account. The assessee also paid interest on an overdraft account, a portion of which was disallowed by the ITO on the ground that it was used to pay income tax. The assessee challenged the disallowance of both the airstrip construction cost and the interest on the overdraft.
Finding of the Court:
1. The construction of the airstrip conferred an enduring benefit on the assessee for a period of 10 years, with an option for a further 10-year term. This benefit was not transient or ephemeral but was of a permanent character. 2. The interest paid on the overdraft was partly utilized for the purpose of payment of taxes, as evidenced by the cumulative debit balance in the account in each of the months.
Issues: 1. Whether the expenditure incurred for the construction of the airstrip was capital in nature, considering that the assessee obtained an enduring benefit from it. 2. Whether the disallowance of a portion of the interest paid on the overdraft was justified, given that the assessee contended that the taxes were paid out of the collection of funds and no overdraft was utilized for that purpose.
Ratio Decidendi: 1. The expenditure for the construction of the airstrip was capital in nature as it was incurred for the acquisition of an asset or a right of a permanent character. The assessee obtained an enduring benefit from the airstrip for a period of 10 years, with an option for a further 10-year term. This benefit was not transient or ephemeral but was of a permanent character, resulting in the appreciation of the assessee's capital asset and increased profit-yielding capacity. 2. The disallowance of a portion of the interest paid on the overdraft was justified as the assessee failed to establish that the taxes were actually paid out of the collection of funds and no overdraft was utilized for that purpose. The Tribunal's finding that the taxes were not actually paid out of the collections of the day, which were first utilized to reduce the debit balance, was based on the evidence before it.
Final Decision: 1. The question of whether the expenditure for the construction of the airstrip was capital in nature was answered in the affirmative, in favor of the Revenue. 2. The question of whether the disallowance of a portion of the interest paid on the overdraft was justified was answered in the negative, in favor of the assessee.
( 1 ) THIS consolidated reference under Section 256 (1) of the I. T. Act, 1961, relates to assessment years 1965-66, 1966-67 and 1968-69, the corresponding previous years ending respectively on the 30th September, of the calendar years 1964, 1965 and 1967. The facts found and/or admitted in the reference are as follows : indian Explosives Ltd. , the assessee, carries on business of manufacture of explosives. Its factory is situated at Gomiah, in the district of Hazaribagh within the State of Bihar. For the convenience of executives who had to travel between Gomiah and Calcutta frequently in connection with the assessee's business, the assessee decided to construct an airstrip in the neighbourhood of Gomiah and purchase an aircraft to be used for such journeys. The assessee entered into an agreement in writing dated 3rd May, 1968, with the National Coal Development Corporation (hereinafter referred to as the Corporation), under which a licence and/or permission was granted to the assessee in respect of a plot of land at Gomiah belonging to the Corporation measuring about 18'25 acres on, inter alia, the following terms and conditions: (a) The said licence and/or permission would be for a term of 10 years commencing from the 1st May, 1963. (b) The assessee would pay an annual licence fee of Rs. 4,500 to the Corporation during the said term. (c) The assessee would construct on the said land at its cost an airstrip and buildings ancillary thereto which would become and remain the property of the Corporation. (d) The assessee would be entitled to use, occupy and enjoy the said land and the airstrip during the said term. (e) In the event of the said land or any part thereof being acquired or requisitioned during the term, the licence would determine and the assessee would be entitled to receive and keep such compensation as it may be entitled to in law subject to the condition that the Corporation would be entitled to receive compensation for the land. (f) On a notice being given before the expiry of the term and subject to due observance and performance of the covenants and conditions by the assessee, the Corporation would grant a further licence to the assessee for another term of ten years on the same terms and conditions except that licence fee payable would be redetermined.
( 2 ) PURSUANT to the said agreement the assessee constructed an airstrip in the said land incurring expenditure of Rs. 3,76,542, Rs. 17,315 and Rs. 32,082 in the respective assessment years 1965-66, 1966-67 and 1968-69. The said expenditure was debited in the assessee's miscellaneous expenses account and written off successively in its profit and loss account as follows:
Assessment year Amount Rs . 1965-66 3,76,542 1966-67 41,118 1967-68 39,384 1968-69 46,151
( 3 ) THE above amounts were claimed by the assessee to be allowable deductions in the said assessment years. The ITO in the proceedings before him held that the construction of the airstrip conferred on the assessee a benefit of an enduring nature and was a capital asset and, therefore, no part of the expenditure was revenue expenditure. He disallowed the claim for deduction.
( 4 ) IN the assessment year 1968-69, the ITO also disallowed another amount of Rs. 2,82,408 paid by the assessee on account of interest on an overdraft account with the Central Bank of India. The ITO found that income-tax had been paid from this account. He also found that the total payments out of this account including taxes exceeded the receipts therein in most of the months and at the end of each month the account had a debit balance. The assessee contended that the taxes were paid out of the receipts and that the amounts received on overdraft were not utilised for payment of taxes. The ITO held that it was not established that the receipts were utilised only for payment of taxes and not for liquidation of the debit balance in the account. He concluded that the receipts in the
