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Issues: (i) Whether the assessee was entitled to full depreciation allowance under section 10(2)(vi) of the Indian Income-tax Act, 1922, read with rule 8 of the Indian Income-tax Rules, 1922; (ii) Whether the expenditure of Rs. 1,65,424 incurred for construction of dams was revenue expenditure or capital expenditure.
Issue (i): Whether the assessee was entitled to full depreciation allowance under section 10(2)(vi) of the Indian Income-tax Act, 1922, read with rule 8 of the Indian Income-tax Rules, 1922.
Analysis: The applicable depreciation under rule 8 had to be worked out in accordance with the statutory scheme governing coal mines and not on the footing of a claim for full depreciation for the entire period. The claim for full depreciation was therefore unsustainable.
Conclusion: The issue was answered against the assessee and in favour of the Revenue.
Issue (ii): Whether the expenditure of Rs. 1,65,424 incurred for construction of dams was revenue expenditure or capital expenditure.
Analysis: The construction created new works intended to prevent recurrence of a serious mine disaster and to protect the mine and labourers. The relevant inquiry was not limited to the protective character of the work, but extended to whether the expenditure brought an enduring advantage to the existing business asset. Since the dams conferred a lasting benefit by safeguarding the mine against future disaster, the expenditure was not merely maintenance of the existing asset but an outlay of capital nature.
Conclusion: The issue was answered in favour of the Revenue and against the assessee; the expenditure was capital expenditure.
Final Conclusion: The reference was answered wholly in favour of the Revenue, with both questions decided against the assessee.
Ratio Decidendi: Expenditure incurred on a new construction that confers an enduring advantage by protecting an existing capital asset against future risk is capital expenditure, not revenue expenditure.
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