The case involved Bikaner Gypsums Ltd. (the assessee), which held a lease for mining gypsum over an area of 4.27 square miles at Jamsar.
The railway authorities extended their railway area by laying down fresh tracks and constructing quarters within the leased area, hindering the assessee's mining operations.
The assessee negotiated with the railway authorities, the Government of Rajasthan, and other parties to shift the railway station and tracks to facilitate mining operations.
As part of the agreement, the assessee paid Rs 3 lakhs to the Northern Railway for the cost of shifting the railway station and other constructions.
The Income Tax Officer and the Appellate Assistant Commissioner rejected the assessee's claim for deduction, considering the payment as capital expenditure.
The Income Tax Appellate Tribunal, however, ruled in favour of the assessee, holding the payment as revenue expenditure.
The High Court overturned the Tribunal's decision, considering the payment as capital expenditure, as it resulted in acquiring a new asset of enduring nature.
Hence, the present appeal before Supreme Court.
ISSUE
Whether the payment of Rs 3 lakhs made by the assessee to the Northern Railway for the shifting of the railway station and tracks should be considered as revenue expenditure or capital expenditure for the purpose of income tax assessment? [refer to sec 37 of ACT,1961]
RULE
Payment made for removing obstacles of business which is necessary for business will be considered as revenue expenditure.
HELD
In B. Seth Moolchand Suganchand v. CIT (1972) 86 ITR 647, The empirical test in mining leases is whether minerals have to be won, extracted, and brought to the surface. If so, the expenditure for acquiring such a right is capital. However, if the minerals are already on the surface, the expenditure for obtaining the right to acquire the raw material may be revenue.
In Commissioner of Inland Revenue v. Carron Company (1966-69) 45 Tax Cas 18, Payments made for removing disabilities to profitable trading were on income account, not capital, as they facilitated day-to-day trading operations without acquiring tangible or intangible assets.
In Empire Jute Company v. CIT [(1980) 124 ITR 1], this Court held that expenditure made by an assessee for the purpose of removing the restriction on the number of working hours with a view to increase its profits was in the nature of revenue expenditure.
The Court held that the payment of Rs 3 lakhs was not for acquiring any new asset but to facilitate the mining business by removing the obstacle.
Since the payment did not result in the acquisition of any capital asset and was made to remove a disability obstructing the business, it was rightly treated as revenue expenditure.
Therefore, the Court allowed the appeal, set aside the High Court's order, and restored the Tribunal's decision, considering the payment as revenue expenditure.
COMMENTARIES RATIO/NOTE
Following this judgment, a Full Bench of the Delhi High Court held that the payment made to remove and rehabilitate squatters on the site of the Delhi international airport was only made to ensure smooth functioning of the airport and not for the acquisition of any asset or advantage in the capital field. In Airports Authority of India v CIT340 ITR 407 (FB)The court allowed the expenses on the relocation of a railway station, track and other constructions to another area as revenue expenditure. The expenditure on the construction of a temporary road linking the workers’ temporary quarters to the factory is revenue expenditure [CIT v Industrial Cables 254 ITR 267].