Mercantile accrual, plant classification, and capital expenditure principles determined deductibility, depreciation, and source-of-funds treatment in hotel business accounts.

Under the mercantile system, hotel receipts tax collected and statutorily payable accrued on collection, so deduction was allowable despite non-payment in the relevant year because section 43B was not yet applicable. Applying the functional test, the hotel building was treated as an operational apparatus of the hotel business and qualified as plant for higher depreciation. Retrenchment compensation paid to secure possession and effective use of acquired business assets was capital in nature and formed part of the asset cost, so depreciation was allowable on the apportioned amount. The addition of the explained sum under section 68 was not sustainable because the advances, cheque repayments, and bank loan sources were satisfactorily evidenced.

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Issues: (i) Whether hotel receipts tax collected and unpaid at year-end was deductible on accrual basis for the assessment year 1983-84 despite non-payment; (ii) whether the hotel building was a plant entitled to higher depreciation; (iii) whether retrenchment compensation paid to settle labour claims was capital expenditure eligible for depreciation; and (iv) whether the sum of Rs. 15,20,000 was wrongly added as income under section 68.

Issue (i): Whether hotel receipts tax collected and unpaid at year-end was deductible on accrual basis for the assessment year 1983-84 despite non-payment.

Analysis: The assessee followed the mercantile system of accounting and was under a statutory obligation to remit the tax collected to the Government. The corresponding liability accrued in the year of collection. Since section 43B had not yet come into force for the relevant assessment year, deduction could not be denied merely because payment had not been made during that year.

Conclusion: The deduction of hotel receipts tax was allowable and the addition was deleted, in favour of the assessee.

Issue (ii): Whether the hotel building was a plant entitled to higher depreciation.

Analysis: Applying the functional test and the wide meaning of plant, the hotel building was treated as an apparatus used in the assessee's business. It was an operational tool in the conduct of the hotel business and therefore fell within the concept of plant for depreciation purposes.

Conclusion: The hotel building qualified as plant and higher depreciation was allowable, in favour of the assessee.

Issue (iii): Whether retrenchment compensation paid to settle labour claims was capital expenditure eligible for depreciation.

Analysis: Although the assessee had not assumed the transferor's liability under the purchase agreement, the payment was made to secure possession of the business assets and to enable the assessee to carry on the business. The expenditure was therefore linked to the acquisition and protection of the capital assets and fell in the capital field. As the payment formed part of the cost of acquiring the assets, depreciation was allowable on the apportioned amount at the applicable rates.

Conclusion: The expenditure was capital in nature and depreciation thereon was allowable, in favour of the assessee.

Issue (iv): Whether the sum of Rs. 15,20,000 was wrongly added as income under section 68.

Analysis: The assessee produced evidence showing that the amount represented advances originally made to the vendors for the hotel purchase and that the sums were returned by cheque. The cash component was also supported by evidence of bank loans taken by the concerned individuals. The material on record satisfactorily explained the source and movement of funds, and the addition was not justified.

Conclusion: The addition of Rs. 15,20,000 was not sustainable and was rightly deleted, in favour of the assessee.

Final Conclusion: The assessee succeeded on all substantial issues, the departmental challenge failed, and the cross-objection supporting the deletion also succeeded.

Ratio Decidendi: Under the mercantile system, a statutory liability accrues when it arises and is deductible unless specifically barred by law; a business asset used as the operating instrument of the trade may constitute plant; and expenditure incurred to secure possession and effective use of acquired capital assets is capital in nature, with depreciation allowable on the apportioned cost when the source of funds is satisfactorily explained.

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