1993 (2) TMI 35 - HC - Income Tax

Court rules on capital expenditure disallowance vs. interest charge under section 216

The court affirmed the disallowance of expenditure for boring a tube well as capital expenditure, emphasizing the creation of an enduring asset. Regarding ... Expenditure On Borewell Issues Involved:1. Whether the expenditure of Rs. 10,051 for boring a tube well was capital or revenue expenditure.2. Whether the Income-tax Officer was justified in charging interest of Rs. 41,410 u/s 216 of the Income-tax Act, 1961.Summary:Issue 1: Expenditure for Boring a Tube Well:The Tribunal confirmed the disallowance of Rs. 10,051 incurred for boring a tube well as capital expenditure. The assessee contended that the expenditure should be considered revenue expenditure since no capital asset came into existence as the water obtained was brackish and unsuitable. The court rejected this contention, stating that the expenditure was made with a view to securing an enduring advantage by creating a tube well, which is a capital asset. The court cited the Supreme Court's affirmation in the case of CIT v. Associated Cement Companies Ltd., emphasizing that expenditure aimed at creating an asset for enduring benefit is capital in nature. The court also referred to CIT v. Shri Digvijay Cement Co. Ltd., holding that the aim and object of the expenditure determine its nature, and even if no asset resulted, the expenditure remains capital if it was intended to create an enduring asset.Issue 2: Charging of Interest u/s 216:The Tribunal upheld the Income-tax Officer's decision to charge interest of Rs. 41,410 u/s 216 due to the assessee underestimating advance tax. The assessee argued that the Income-tax Officer did not record the requisite finding or provide reasons for charging interest, making the order invalid. The court agreed with the assessee, stating that the levy of interest u/s 216 is discretionary and not automatic. The Income-tax Officer must record a finding that the underestimation was deliberate or intentional. The court cited several High Court decisions, including Spaco Carburetors (India) Ltd. v. M. A. Ajinkya and Addl. CIT v. Vazir Sultan Tobacco Co. Ltd., emphasizing that a specific finding and reasons are necessary for charging interest under section 216. The Tribunal misunderstood the assessee's grievance, and the court held that the Tribunal should have set aside the order and remanded the matter to the Income-tax Officer for a fresh order as per section 216.Conclusion:The court answered question No. 1 in the affirmative, against the assessee and in favor of the Revenue, and question No. 2 in the negative, in favor of the assessee and against the Revenue. No order as to costs.